Human Capital is a pivotal pillar for the prosperity of a company. With the growing economy and increase in opportunities, it has become essential for the companies to come out with beneficial remuneration schemes to retain their senior employees as well as attract superior talents. The Employee benefit schemes have become leading channels for rewarding employees either by way of cash or shares of the company. The scope of the employee benefits scheme offered by both listed and unlisted companies and the manner in which these schemes are regulated are elaborated below.
Historical Background:
The First Employee Stock Ownership Plan was devised by Mr. Louis O. Kelso in 1956 for Peninsula Newspapers Inc. in the course of developing a succession plan as the Co-owners sought retirement without selling the company. The owners desired to sell the company to its employees but the employees lacked capital to purchase the company. Mr. Kelso devised a plan which would enable the working people without savings to buy stock in their employer company and pay for it out of its future dividend yield.
In 1958, he created the first Consumer Stock Ownership Plan (CSOP), a trust that provides equity shares to consumers. The CSOP allowed a group of dairy farmers in California’s Central Valley to become customer/owners of Valley Nitrogen Producers thus pioneering the issue of equity shares through a trust.
In India, Wipro and Infosys were one of the pioneering companies to issue Employee Stock Option Plans in the early 1990s.
Share Based Employee Benefits:
Regulatory Aspects pertaining to issuance of ESOPs
Applicability of SEBI (Share Based Employee Benefits) Regulations, 2014 (“SBEB”)
- Any company whose shares are listed on a recognised stock exchange in India, and
- The Scheme
- for direct or indirect benefit of employees; and
- involving dealing in or subscribing to or purchasing securities of the company, directly or indirectly; and
- satisfying, directly or indirectly, any one of the following conditions
- the scheme is set up by the company or any other company in its group;
- the scheme is funded or guaranteed by the company or any other company in its group;
- the scheme is controlled or managed by the company or any other company in its group*.
*“Group” means two or more companies which, directly or indirectly, are in a position to –
(i) exercise 26% or more of the voting rights in the other company; or
(ii) appoint more than 50% of the members of the board of directors in the other company; or
(iii) control the management or affairs of the other company.
Criteria for Eligible employees:
| Listed Company | Other Companies | |
| Regulations | SEBI (Share Based Employee Benefits) Regulations, 2014 | Rule 12 of Companies (Share Capital and Debenture) Rules, 2014 |
| Eligible | √ a permanent employee of the company who has been working in India or outside India; or
√ a director of the company, whether a whole time director; or √ an employee as defined in clause (i) or (ii) of a subsidiary, in India or outside India, or of a holding company of the company; √ a director nominated by an institution as its representative on the Board:
|
√ A permanent employee of the company who has been working in India or outside India; or
√ a director of the company, whether a whole time director or not; or √ an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company. |
| Not Eligible | √ an employee who is a promoter or a person belonging to the promoter group;
√ a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the company; √ Independent Director |
√ an employee who is a promoter or a person belonging to the promoter group; or
√ a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the company. √ Independent Director Clause (i) and (ii) – Not applicable to start ups up to 10 years from date of its incorporation or registration. |
Eligible securities
- Equity shares;
- Securities convertible into equity shares;
- American Depository Receipts (ADRs), Global Depository Receipts (GDRs);
- Other depository receipts representing underlying equity shares.
Share Based Employee Benefits
1. Employee Stock Option Scheme (ESOS)
1.1 Definitions
As per SBEB, “Option” means option given to an employee which gives him a right to purchase or subscribe at a future date, the shares offered by the company, directly or indirectly, at a pre-determined price.
As per Companies Act, 2013, “employees’ stock option” means the option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price.
ESOP is a contract that gives employees the right, but not obligation, to purchase or subscribe to a specified number of shares of the company at a fixed price, that is, the exercise price. The exercise price remains fixed even if the market price goes up in future.
1.2 Process
1.3 Administration
√ The Company shall have the freedom to determine the exercise price subject to conforming to the ‘Guidance Note on Accounting for employee share-based Payments’;
√ Minimum vesting period = one year;
√ Freedom to specify lock in period;
√ In case of failure to exercise option, the amount payable by the employee, if any, at the time of grant of option:
(a) may be forfeited by the company if the option is not exercised by the employee within the exercise period; or
(b) may be refunded to the employee if the options are not vested due to non-fulfilment of conditions relating to vesting of option as per the ESOS.
√ For unlisted companies, pursuant to Rule 12 of the Companies (Share Capital and Debenture) Rules, 2014,
- there shall be a minimum period of one year between the grant of options and vesting of option;
- The company shall have the freedom to specify the lock-in period for the shares issued pursuant to exercise of option.
2. Employee Stock Purchase Scheme (ESPS)
A company offers shares to employees as part of public issue or otherwise.
2.1 Difference between ESOS and ESPS
| Employee Stock Option Scheme (ESOS) | Employee Stock Purchase Scheme (ESPS) |
| “Options” are granted to Employees. | “Shares” are offered to Employees. |
| The Employee has an option at the time of allotment of shares. | Since the shares have already been purchased by the employee at the purchase price, the employee is not permitted to withdraw from the plan. |
2.2 Administration
√ Freedom to the company to determine the exercise price subject to conforming to the ‘Guidance Note on Accounting for employee share-based Payments’;
√ Locked-in for a minimum period of one year from the date of allotment;
√ If ESPS is part of a public issue and the shares are issued to employees at the same price as in the public issue, the shares issued to employees pursuant to ESPS shall not be subject to lock-in.
2.3 Maximum Limit that can be reserved for ESPS
√ As per SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2018, the aggregate reservation for employees shall not exceed 5% of the of the post issue capital of the issuer;
√ The value of allotment to any employee shall not exceed Rs. 2 Lakhs;
√ In the event of under subscription in the reserved portion, the unsubscribed portion may be allotted to an employee exceeding Rs. 2 Lakhs but not exceeding Rs. 5 Lakhs.
3. General Employees Benefit Scheme (GEBS)
3.1 Definition
Any scheme of a company dealing in shares of the company or the shares of its listed holding company, for the purpose of employee welfare including healthcare benefits, hospital care or benefits, or benefits in the event of sickness, accident, disability, death or scholarship funds, or such other benefit as specified by such company.
The SBEB Regulations do not specify much framework for administration and implementation of the GEBS as some of the benefits which the scheme is intended for are emergency based such as sickness or accident and thus allow companies complete flexibility to implement the same.
3.2 Ceiling on issue of shares
The shares of the company or shares of its listed holding company shall not exceed 10% of its
4. Retirement Benefits Scheme (RBS)
This scheme provides retirement benefits to employees and the ceiling applicable to GEBS is also applicable to RBS.
5. Stock Appreciation Rights Scheme (SARS)
5.1 Definition
A right given to a SAR grantee entitling him to receive appreciation for a specified number of shares of the company where the settlement of such appreciation may be made by way of cash payment or shares of the company.
(“Appreciation” = Market Price of the share of a company on the date of exercise/ Vesting of Stock Appreciation Right – SAR Price [the base price defined on the grant date of SAR for the purpose of computing appreciation
5.2 Administration
√ Freedom to implement cash settled or equity settled SAR scheme;
√ in case of equity settled SAR scheme, if the settlement results in fractional shares, then the consideration for fractional shares should be settled in cash;
√ Minimum vesting period = one year;
√ The employee shall not have right to receive dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of SAR granted to him.
1. Direct Route
Under the Direct route, the company grants options to its employees and upon exercise, fresh issue of equity shares is made to allot equity shares to eligible employees
2. Trust Route
In this Route, the Company creates a Trust under Indian Trust Act, 1882 specifically for the purpose of implementation of the Employee Benefit Schemes. When the employees decide to exercise their option, the Trust would acquire the shares from the secondary market and transfer the shares in the name of the employees.
Implementation of scheme through trust has to be decided upfront at the time of taking approval of the shareholders for setting up the schemes.
If the scheme involves secondary acquisition or gift or both, then it is mandatory for the company to implement such scheme through a trust.
“Secondary acquisition” means acquisition of existing shares of the company by the trust on the platform of a recognised stock exchange for cash consideration.
The company may lend monies to the trust on appropriate terms and conditions to acquire the shares either through new issue or secondary acquisition, for the purposes of implementation of the scheme.
2.1 Lending of money by the Company
The Trust created for the purpose of implementation of the schemes may not have the money to acquire shares of the Company from the Secondary Market.
Section 67 of the Companies Act, 2013 allows companies to give loans for purchase of its shares pursuant to any scheme approved by company through special resolution, for the purchase of, or subscription for, fully paid-up shares in the company or its holding company, if the purchase of, or the subscription for, the shares held by trustees for the benefit of the employees or such shares held by the employee of the company subject to the following conditions:
√ approved by the members by passing special resolution in a general meeting;
√ such purchase of shares shall be made only through a recognized stock exchange in case the shares of the company are listed and not by way of private offers or arrangements;
√ where shares of a company are not listed on a recognized stock exchange, the valuation at which shares are to be purchased shall be made by a registered valuer;
√ the value of shares to be purchased or subscribed + the money provided by the company < 5% of paid up capital + free reserves of the company;
2.2 Implementation
√ Several schemes can be implemented through a single trust;
√ The Trust shall not deal in derivatives;
√ The Trust shall undertake only delivery based transactions for the purposes of secondary acquisition.
2.3 Shareholding of the Trust
√ The shareholding of the trust shall be shown as ‘non-promoter and non-public’ shareholding;
√ Shares held by the trust shall not form part of the public shareholding which needs to be maintained at a minimum of 25%.
2.4 Secondary Acquisition – Limits
What if the options, shares or SAR Rights exceed the number of shares that the trust may acquire through Secondary Acquisition?
Such shortfall shall be made up by new issue of shares by the company in accordance with the applicable regulations.
2.5 Transfer of shares
2.5.1 – By the Trust
√ The shares acquired shall be held by the trust for a minimum period of 6 months;
√ Exceptions – The Trust is permitted to undertake transfer of shares off-market/ through stock exchange platform:
-
- transfer to the employees pursuant to scheme(s);
- participating in open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
- participating in buy-back, delisting or any other exit offered by the company generally to its shareholders.
2.6 Selling of shares in the secondary market:
2.5.2 By the entitled employees
√ As per SBEB Regulations and Rule 12 of the Companies (Share Capital and Debenture) Rules, 2014, no person other than the employee to whom the option, SAR or other benefit is granted shall be entitled to the benefit arising out of it;
√ Shall not be pledged, hypothecated, mortgaged or otherwise alienated in any other manner;
√ Death of the employee while in employment: shall vest in the legal heirs or nominees of the deceased employee;
√ Permanent incapacity while in employment: shall vest in him on the date of permanent incapacitation
√ Resignation or termination of the employee: all the options, SAR, or any other benefit which are granted and yet not vested as on that day shall expire:
-
- If vested, the employee can retain the same subject to the terms and conditions formulated by the compensation committee.
√ Transfer/ deputation to Associate co.: Prior to vesting – the vesting and exercise as per the terms of grant shall continue.
2.7 Trustees
As per Companies Act, 2013 and SBEB Regulations, the following people shall not be trustees:
a) a director, key managerial personnel or promoter of the company or its holding, subsidiary or associate company or any relative of such director, key managerial personnel or promoter; or
b) who beneficially holds 10% or more of the paid-up share capital of the company.
c) If One Person Companies’ as defined under the Companies Act, 2013 are appointed as trustees, there shall be a minimum of two such trustees;
d) If corporate entity is appointed as a trustee, then it may be the sole trustee.
2.8 Winding up of schemes
Excess monies or shares remaining with the trust after meeting all the obligations, shall be utilised for
> repayment of loan or
> by way of distribution to employees as recommended by the compensation committee.
Compensation Committee
A company shall constitute a compensation committee for administration and superintendence of the schemes. Where the scheme is being implemented through a trust the compensation committee shall delegate the administration of such scheme(s) to the trust.
The Committee shall consist of three or more non-executive directors out of which not less than one-half shall be independent directors.
The terms and conditions of the scheme shall be formulated by such committee which shall include the provisions as specified by SEBI in its Circular No. CIR/CFD/POLICY CELL/2/2015 dated June 16, 2015.
Variation of terms of the scheme
As per SBEB Regulations and Rule 12 of the Companies (Share Capital and Debenture) Rules, 2014,
The company may vary the terms of Employees Stock Option Scheme not yet exercised by the employees if the following conditions are satisfied:
√ Passing of special resolution in a general meeting
√ Such variation is not prejudicial to the interests of the option holders.
√ The notice for passing special resolution shall disclose:
-
- full details of the variation;
- the rationale therefor;
- details of the employees who are beneficiaries of such variation
A company may reprice the options, SAR or shares, as the case may be which are not exercised, whether or not they have been vested if the schemes were rendered unattractive due to fall in the price of the shares in the stock market ensuring such repricing is not detrimental to the interest of the employees and approval of the shareholders in general meeting has been obtained for such repricing.
Procedure for issue of ESOP
1. The Company has to identify eligible employees to avail the benefits under ESOP Schemes;
2. Preparation of an ESOP Scheme;
3. Approval of the Scheme by Nomination and Remuneration Committee, if any;
4. Approval of the Board;
5. Approval of the scheme by the shareholders by way of special resolution;
6. Grant letter of option to eligible employees.
7. Once the option is accepted by the eligible employees, execute the ESOP agreement with each eligible employee.
8. Upon expiry of vesting period, if an employee has exercised the option to acquire shares, allot the shares.
Approval of shareholders by way of a special resolution
In the following circumstances, approval of the shareholders shall be obtained by way of a separate resolution:
As per Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014,
√ grant of option to employees of subsidiary or holding company; or
√ grant of option to identified employees, during any one year, equal to or exceeding one percent of the issued capital.
As per SBEB Regulations,
√ If the scheme is proposed to be implemented through secondary acquisition;
√ Secondary acquisition by the trust in case the share capital expands due to capital expansion undertaken by the company including preferential allotment of shares or qualified institutions placement, to maintain the 5% cap of such increased capital of the company;
√ Grant of option, SAR, shares or other benefits, as the case may be, to employees of subsidiary or holding company;
√ Grant of option, SAR, shares or other benefits to identified employees, during any one year, equal to or exceeding 1% of the issued capital at the time of grant of option, SAR, shares or incentive.
Compliances pertaining to issue of ESOP:
A company shall comply with the applicable provisions of Companies Act, 2013 and the Rules made thereunder, SEBI Act 1992 and the Regulations made thereunder and any other applicable laws including the following:
1. Obtaining of in-principle approval of the stock exchanges.
2. Appointment of a registered merchant banker for the implementation of schemes covered by these regulations till the stage of obtaining in-principle approval from the stock exchanges.
3. If the company issues options etc. to the employee of its subsidiary, the cost incurred by the company shall be disclosed in the ‘notes to accounts’ of the financial statements of the subsidiary company. In case of re-imbursement, both the companies shall disclose in the notes of accounts.
4. The board of directors shall at each annual general meeting place before the shareholders a certificate from the auditors of the company that the scheme(s) has been implemented in accordance with these regulations and in accordance with the resolution of the company in the general meeting.
Disclosures
Disclosures under the Companies (Share Capital and Debentures) Rules, 2014
Under Explanatory Statement –
1. The company shall make the following disclosures in the explanatory statement annexed to the notice for passing of the special resolution –
(a) the total number of stock options to be granted;
(b) identification of classes of employees entitled to participate in the Employees Stock Option Scheme;
(c) the appraisal process for determining the eligibility of employees to the Employees Stock Option Scheme;
(d) the requirements of vesting and period of vesting;
(e) the maximum period within which the options shall be vested;
(f) the exercise price or the formula for arriving at the same;
(g) the exercise period and process of exercise;
(h) the Lock-in period, if any;
(i) the maximum number of options to be granted per employee and in aggregate;
(j) the method which the company shall use to value its options;
(k) the conditions under which option vested in employees may lapse e.g. in case of termination of employment for misconduct;
(l) the specified time period within which the employee shall exercise the vested options in the event of a proposed termination of employment or resignation of employee; and
(m) a statement to the effect that the company shall comply with the applicable accounting standards.
2. If the Company lend monies for purchase of its Own Shares by Employees or by Trustees for the Benefit of Employees the following disclosures shall be made
(a) the class of employees for whose benefit the scheme is being implemented and money is being provided for purchase of or subscription to shares;
(b) the particulars of the trustee or employees in whose favor such shares are to be registered;
(c) the particulars of trust and name, address, occupation and nationality of trustees and their relationship with the promoters, directors or key managerial personnel, if any;
(d) the any interest of key managerial personnel, directors or promoters in such scheme or trust and effect thereof;
(e) the detailed particulars of benefits which will accrue to the employees from the implementation of the scheme;
(f) the details about who would exercise and how the voting rights in respect of the shares to be purchased or subscribed under the scheme would be exercised
Under Directors Report –
1. The Board of directors, shall, inter alia, disclose in the Directors’ Report for the year, the following details of the Employees Stock Option Scheme:
(a) options granted;
(b) options vested;
(c) options exercised;
(d) the total number of shares arising as a result of exercise of option;
(e) options lapsed;
(f) the exercise price;
(g) variation of terms of options;
(h) money realized by exercise of options;
(i) total number of options in force;
(j) employee wise details of options granted to;-
(i) key managerial personnel;
(ii) any other employee who receives a grant of options in any one year of option amounting to five percent or more of options granted during that year.
(iii) identified employees who were granted option, during any one year, equal to or exceeding one percent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant;
2. Where the voting rights are not exercised directly by the employees in respect of shares to which the scheme relates, the Board of Directors shall, inter alia, disclose in the Board’s report for the relevant financial year the following details
(a) the names of the employees who have not exercised the voting rights directly;
(b) the reasons for not voting directly;
(c) the name of the person who is exercising such voting rights;
(d) the number of shares held by or in favour of, such employees and the percentage of such shares to the total paid up share capital of the company;
(e) the date of the general meeting in which such voting power was exercised;
(f) the resolutions on which votes have been cast by persons holding such voting power;
(g) the percentage of such voting power to the total voting power on each resolution;
(h) whether the votes were cast in favour of or against the resolution.
Disclosures pursuant to SEBI (Share Based Employee Benefits) Regulations, 2014
The Disclosures required under the SBEB Regulations were specified by the SEBI vide its Circular CIR/CFD/POLICY CELL/2/2015 dated June 16, 2015. The said Circular provides necessary guidelines for disclosures required to be made in explanatory statement of the notice, directors report, information to be disclosed in the statement to be filed with the stock exchanges, the information to be provided to the prospective Option/ SAR grantees etc. The Circular can be accessed at the below link.
https://taxguru.in/sebi/requirements-sebi-share-based-employee-benefits-regulations-2014.html
*****
DISCLAIMER: All content of this document is for informational purposes only. In no event shall I be liable for any errors or omissions in this information or for any result arising out of or in connection with the use of the information.
Author Bio
