PART XIII EMPLOYEE STOCK OPTION/ PURCHASE SCHEME Synopsis 1. 2. 3. 4.
Employees Stock Option Why shares are issued under ESOS? What are ESOPs? Issue of shares to employees under the Employees Stock Option Scheme by listed and unlisted companies 5. Salient features of SEBI ESOP Guidelines 6. Promoter and Promoter Group under ESOP Guidelines 6.1 Promoter means 6.2 Promoter group means 7. ESOP Compensation Committee 8. Determination of Exercise Price 9. When are they taxed? 10. Are shares purchased under ESOP is a perquisite? 11. Benefit accrued by employees under ESOP not taxable 12. Valuation of shares issued under ESOP granted by the employer for fringe benefit taxation A. Determination of FMV in the case of listed company B. Determination of FMV in the case of Unlisted company 13. Issue of shares under Employees Stock Options Scheme to persons resident outside India — [FEMA (Transfer or Issue of Security by a person Resident Outside India) Regulations, 2000] 14. Procedure for issuance of shares under ESOP 15. What are Stock Purchase Plans? 16. Salient features of SEBI — ESPS Guidelines 17. Eligibility to participate in Employee Stock Option/Purchase [Clauses 4 and 16] 18. ESOS/ESPS through Trust Route 19. Procedure for issuance of shares under ESPS 20. Case study 20.1 Whether the Company can allot shares against the stock options already vested in the employees as subsisting liabilities during the buyback period, or alternatively can it extend the 90 days window as specified in ESOP scheme drawn in pursuance to SEBI ESOP guidelines, till the buyback is completed? 20.2 Whether the Company can extend the tenure of the options till the conclusion of buyback, which are expiring during the buyback period or alternatively extend the 90 days windows for exercised options? 20.3 Whether the Company can issue stock option grant letters to the employees during the buyback offer and within a period of six months from the conclusion of the buyback offer, where the stock options would vest, only after the conclusion of the Buyback process and six months thereafter? 20.4 Should the transaction of the trust be reflected in the financials of the company as if these have been carried out by the company itself and the account of the trust to be consolidated with the company financials? Should the transaction of the trust be reflected as being done by a separate entity, independent of the company financials? Can the company grant options to such independent directors under ESOP who will be acting as trustees to the trust? Appendix 1 Specimen of Special Resolutions for issuance of shares under ESOP Scheme
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1. Employees Stock Option Shares could be offered to employees under the Employees Stock Option Scheme for which the SEBI has issued Guidelines captioned, Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. The Companies (Amendment) Act, 2000 inserted a definition defining the expression, ‘employees stock option’. The said definition vide section 2(15A) reads as under: “Employees stock option” means the option given to the whole-time directors, officers or employees of a company, which gives such directors, officers or employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price.” ESOS carry the right, but not the obligation, to buy a certain amount of shares in the company at a predetermined price for a certain number of years (option period). The fixed price is called the 'grant' or 'strike' or 'exercise' price and is typically the market value/fair value of the shares on the date of grant. Since the grant price remains fixed over the term of the option, the employee expects that the share price would increase and he would gain by exercising his option at a lower price. Before the employee can exercise the option he is usually required to complete the vesting period (or fulfill other vesting restrictions) which typically require that he continue to work for the Company for a minimum number of years (three to five years) before part or all of the options can be exercised. Many a times, certain performance targets are set before the options can be exercised. 2. Why shares are issued under ESOS? The idea behind stock options is to align incentives between the employees and shareholders of a company. Shareholders want to see the stock appreciate, so rewarding employees when the stock goes up ensures, in theory that everyone is striving for the same goals. Critics point out, however, that there is a big difference between an option and the ownership of the underlying stock. If the stock goes down, the holder of an option would lose the opportunity for a bonus, but wouldn't feel the same pain as the owner of the stock. This is especially true with employee stock options because they are often granted without any cash outlay from the employee. 3. What are ESOPs? An Employee Stock Option Plan is when the company offers its shares to the employees. An ESOP is nothing but an option to buy the company's share at a certain price. Under this plan, companies provides employees a plan by which the employees get an option to acquire shares of their employer company over a period of time at a reduced price or nil price. Therefore, ESOP is primarily a kind of incentive to hold the employees to the company's fold. 4. Issue of shares to employees under the Employees Stock Option Scheme by listed and unlisted companies Companies offer their employees shares because it is considered that having a stake in the company would increase loyalty and motivation substantially. It depends on company policy and your designation. There are time limits for availing this scheme. For instance, employee can acquire the shares after he complete a particular period of employment. This could be a year, even longer. This is known as the vesting period, and generally ranges from one to five years. If employee quit his job before this period is complete, the stock options lapse. Sometimes, the ESOPs are given in a phased out fashion — 20% in the second year, another 20% in the third year, etc. The Act is silent with regard to issue of shares to employees under the Employees Stock Option Scheme. But in section 77A, relating to buy-back of shares there is a mention in sub-section (5)(d) of section 77A that shares could be bought back from the employees of the company from shares issued to them pursuant to a scheme of stock option. Thus by implication the Act recognises the issue of shares to employees under an Employees Stock Option Scheme.
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In the SEBI Guidelines a definition identical to the definition of ‘Employees Stock Option’, contained in section 2(15A) of the Act was inserted with effect from 30-6-2003. The said Guidelines are applicable to listed companies and have 23 clauses and VI Schedules attached to it. There are no Guidelines in regard to issue of shares to employees of unlisted public companies and private limited companies. Presumably such companies could issue shares under the Employees Stock Option Scheme, after framing one such scheme, for, as pointed out earlier, by implication, the Act recognises such an issue. 5. Salient features of SEBI ESOP Guidelines 1. ESOP schemes of listed companies must be issued and administrated strictly in accordance with SEBI guidelines. 2. The company (referred as Offeror) should issue a detailed offer document containing the terms and conditions of ESOP offer. 3. The Offering Company should constitute a Compensation Committee (a committee of Board of directors, which should have majority of Independent Directors) for administration and superintendence of the ESOP. 4. Options can be granted only to eligible permanent employees of the Company but excluding (i) employees belonging to promoter group and (ii) Directors holding 10% or more of capital base either directly or with relatives. 5. Where an eligible employee is a director nominated by an institution as its representative on the Board of Directors of the company – (i) the contract/agreement entered into between the institution nominating its employee as the director of a company and the director so appointed shall, inter-alia, specify the following: (a) whether options granted by the company under its ESOS can be accepted by the said employee in his capacity as director of the company; (b) that options, if granted to the director, shall not be renounced in favour of the nominating institution; and (c) the conditions subject to which fees, commissions, ESOSs, other incentives, etc. can be accepted by the director from the company. (ii) the institution nominating its employee as a director of a company shall file a copy of the contract/agreement with the said company, which shall, in turn, file the copy with all the stock exchanges on which its shares are listed. (iii) the director so appointed shall furnish a copy of the contract/agreement at the first Board meeting of the company attended by him after his nomination.]1 An important aspect of this amendment is that the “options granted to a director, who is an employee of an institution and has been nominated by the said institution, shall not be renounced in favour of the institution nominating him”. This structure places emphasis on the role of the nominee director towards the company as such director is being remunerated for services performed to the company, and thereby buttresses the position that nominee directors owe their duties to the company. As regards stock options, the new amendments also prescribe the practice of nominee directors turning over their fees or remuneration to the nominating institutions. In that sense, the nominating institutions exercise their powers at the time of nomination (in terms of determining which individual they nominate on boards). After such appointment, the principal legal relationship is that between the nominee director and the company. 6. ESOP Scheme can also be issued for ADR or GDR or other Depository receipts or for securities convertible into equity shares.
1
Inserted vide SEBI Circular No. SEBI/CFD/DIL/ESOP/4/2008/04/08, dated August 4, 2008.
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7.
ESOP Scheme must be approved by shareholders at a general meeting by a special resolution. The explanatory statement to the Notice convening the General Meeting must contain disclosures as mandated in Para 6.2(a) to (k) of the SEBI guidelines. 8. The terms and conditions of ESOP scheme can be amended by special resolution at Shareholders meeting. 9. The companies can also re-price unexercised options unless the same are prejudicial to the interests of options grantees. [Clause 7] 10. In case the ESOP scheme is offered to employee of Holding or Subsidiary Company or to some identified employees, then a separate resolution must be passed at the shareholders meeting. 11. A company may re-price the options, which are not exercised, whether or not they have been vested, if ESOPs are rendered unattractive due to fall in the price of the shares in the market. [Clause 7.5] 12. There should be a minimum vesting period of 1 year for grant of option. [Clause 9.1] 13. In a case where options are granted by a company under an ESOS in lieu of options held by the same person under an ESOS in another company which has merged or amalgamated with the first mentioned company, the period during which the options granted by the transferor company were held by him shall be adjusted against the minimum vesting period. [Clause 9.1 Proviso] 14. The duration of lock in period after allotment under ESOP is left at the discretion of Companies. [Clause 9] 15. This flexibility can be used by the Offering Companies to make the offer attractive as well as to serve the end purpose of employee retention. 16. Options right cannot be transferred/pledged/hypothecated/mortgaged or otherwise alienated in any manner. [Clause 11.3] This is a personal right only to the offeree. 17. In the event of the death of employee while in employment, all the option granted to him till such date shall vest in the legal heirs or nominees of the deceased employee. [Clause 11.4] 18. In case the employee suffers a permanent incapacity while in employment, all the option granted to him as on the date of permanent incapacitation, shall vest in him on that day. [Clause 11.5] 19. In the event of resignation or termination of the employee, all options not vested as on that day shall expire subject to the provision of clause 5.3(b) shall be entitled to retain all the vested options. [Clause 11.6] 20. The options granted to a director, who is an employee of an institution and has been nominated by the said institution, shall not be renounced in favour of the institution nominating him. [Clause 11.7] 1 21. The Directors’ Report should contain following disclosure as stated in Clause 12 of SEBI Guidelines: (a) options granted, the pricing formula, options vested, options exercised, options lapsed; (b) the total number of shares arising as a result of exercise of option; (c) variation of terms of options; (d) money realised by exercise of options; (e) total number of options in force; (f) employee wise details of options granted to;(i) senior managerial personnel; (ii) any other employee who receives a grant in any one year of option; (iii) amounting to 5% or more of option granted during that year; (iv) identified employees who were granted option, during any one year; 1
Inserted vide SEBI Circular No. SEBI/CFD/DIL/ESOP/4/2008/04/08, dated August 4, 2008.
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(v) equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant; (g) diluted Earnings Per Share (EPS) pursuant to issue of shares on exercise of option calculated in accordance with Accounting Standard 20 ‘Earnings Per Share’. (h) Where the company has calculated the employee compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed. The impact of this difference on profits and on EPS of the company shall also be disclosed. (i) Weighted-average exercise prices and weighted-average fair values of options shall be disclosed separately for options whose exercise price either equals or exceeds or is less than the market price of the stock. (j) A description of the method and significant assumptions used during the year to estimate the fair values of options, including the following weighted-average information: (i) risk-free interest rate, (ii) expected life, expected volatility, expected dividends, and (iii) the price of the underlying share in market at the time of option grant. 22. The shares issued and allotted under ESOP scheme should be listed immediately upon allotment in any recognized stock exchange where the securities of the company are listed provided that: (i) ESOP is in accordance with these Guidelines. (ii) The Company has to file with the concerned stock exchange(s), before the exercise of Option, a statement as per Schedule V and should obtain in-principle approval from such Stock Exchanges. (iii) As and when ESOPs are exercised, the company should notify the Stock Exchanges concerned in Schedule VI. 6. Promoter and Promoter Group under ESOP Guidelines 6.1 Promoter means: (a) the person or persons who are in overall control of the company; (b) the person or persons who are instrumental in the formation of the company or programme pursuant to which the shares were offered to the public; (c) the persons or persons named in the offer document as promoter(s). Director or officer of the company if they are acting as such only in their professional capacity will not be deemed to be a promoter. Where a promoter of a company is a body corporate, the promoters of that body corporate shall also be deemed to be promoters of the company. [Clause 2.1(2)] 6.2 Promoter group means (a) An immediate relative of the promoter (i.e. spouse of that person, or any parent, brother, sister or child of the person or of the spouse); (b) Persons whose shareholding is aggregated for the purpose of disclosing in the offer document "shareholding of the promoter group". [Clause 2.1(3)] 7. ESOP Compensation Committee The key responsibilities of the ESOP Compensation Committee under Clause 5.3 include the following: (i) To formulate ESOP plans and decide on future grants. (ii) To formulate terms and conditions on followings under the present two Employee Stock Option Schemes of the Company: (a) the quantum of option to be granted under ESOP Scheme(s) per employee and in aggregate;
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(b) the conditions under which option vested in employees may lapse in case of termination of employment for misconduct; (c) the exercise period within which the employee should exercise the option and that option would lapse on failure to exercise the option within the exercise period; (d) the specified time period within which the employee shall exercise the vested options in the event of termination or resignation of an employee; (e) the right of an employee to exercise all the options vested in him at one time or at various points of time within the exercise period; (f) the procedure for making a fair and reasonable adjustment to the number of options and to the exercise price in case of corporate actions such as rights issues, bonus issues, merger, sale of division and others; (f) the grant, vest and exercise of option in case of employees who are on long leave; and (h) the procedure for cashless exercise of options. (iii) Any other matter, which may be relevant for administration of ESOP Schemes from time to time. (iv) To frame suitable policies and systems to ensure that there is no violation of Securities and Exchange Board of India (Insider Trading) Regulations, 1992 and Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995. (v) Other key issues as may be referred by the Board. 8. Determination of Exercise Price Exercise price means the price payable by the employee for exercising the option granted to him in pursuance of ESOS. [Clause 2(1)(7)] The companies granting option to its employees pursuant to ESOS will have the freedom to determine the exercise price subject to conforming to the accounting policies specified in Clause 13.1. [Clause 8.1] In case the company calculates the employee compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed in the Directors’ Report and also the impact of this difference on profits and on Earning Per Share of the company shall also be disclosed in the Directors’ Report. 9. When are they taxed? The ESOP is not taxed on acquiring the shares. Employees are taxed on the profit they make when they sell the shares or transfer them. Transfer here refers to gift it to someone or transfer it to someone else under an irrevocable deed. 10. Are shares purchased under ESOP is a perquisite? Under proviso to section 17(2) of the Income-tax Act, 1961 the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any Employees Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued in this behalf by the SEBI shall not be treated as a perquisite. Hence the employee need not worry about being taxed on purchase of ESOP. Such purchase of ESOP shall not be taxable at the time of exercising it. This is subject to the condition that the stock option plan is as per the guideline issued by the SEBI. Where the plan is not as per the guidelines issued by the SEBI, the difference between the value of such shares, debentures or warrants issued under ESOP and the price paid by the employee shall be taxed as perquisite. Hence an employee has to ascertain whether the ESOP plan is as per the guideline issued by the SEBI and decide exercising such option 11. Benefit accrued by employees under ESOP not taxable The Supreme Court while deciding the appeal filed by the Revenue Department held that benefit accrued by employees under Employee Stock Option Scheme (ESOP) is not taxable. The Supreme Court observed that company is not obliged to deduct tax at source (TDS) from the benefit given by the company
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to its employees under ESOP. The dispute related to taxability arose between Infosys Technologies and revenue department when the company was treated as defaulter for not deducting TDS from the amount paid by the company to its employees under ESOP. The Tribunal as well as the High Court had decided the matter in company’s favour and thus, the Department filed the appeal. The appeal was dismissed by the Supreme Court. 12. Valuation of shares issued under ESOP granted by the employer for fringe benefit taxation The Finance Act, 2007 had amended the provisions of the Income-tax Act to provide that employers will be liable to pay fringe benefit tax (‘FBT’) on the value of specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer to his employees free of cost or at concessional rate under the ESOP scheme. Such fringe benefit is to be valued at the Fair Market Value (‘FMV’) of the specified security or sweat equity share on the date on which the option vests with the employee as reduced by the amount actually paid by or recovered from the employee in respect of such security or shares. In this regard, the Central Board of Direct Taxes (‘CBDT’) has now inserted new Rule 40C in the Income Tax Rules vide Notification No. 264/2007, dated 23 October, 2007 whereby the following methods have been prescribed for determining the FMV of the specified securities or sweat equity shares. These rules are made effective from 1st April, 2008 and hence, applicable in respect of the specified security or sweat equity shares issued during the financial year 2007-08. However Rules do not spell out how ESOPs given by multinational companies to their expatriate employees in India would be taxed. A. Determination of FMV in the case of listed company (1) When the shares of the company are listed on an Indian recognized stock exchange (a) When the shares are traded on the date of vesting FMV is the average of the opening price and the closing price on the stock exchange on the date of vesting of option in the hands of the employee. (b) When the shares are not traded on the date of vesting FMV is the closing price on a date closest to the date of vesting of the option and immediately preceding such date. (2) When the shares of the company are listed on more than one Indian recognized stock exchanges (a) When the shares are traded on the date of vesting FMV is the average of the opening price and the closing price on the stock exchange, which records the highest volume of trading in shares on the date of vesting of option in the hands of the employee. (b) When the shares are not traded on the date of vesting FMV is the closing price on a date closest to the date of vesting of the option and immediately preceding such date on the stock exchange which records the highest volume of trading in shares. B. Determination of FMV in the case of Unlisted company FMV shall be the value as determined by a Category I merchant banker registered with Securities and Exchange Board of India on the specified date. For the purpose of this rule, the following definitions have been provided,— (a) CLOSING PRICE of a share on a recognized stock exchange on a date shall be the price of the last settlement on such date on such stock exchange: Provided that where the stock exchange quotes both “buy” and “sell” prices, the closing price shall be the “sell” price of the last settlement. (b) OPENING PRICE of a share on a recognised stock exchange on a date shall be the price of the first settlement on such date on such stock exchange: Provided that where the stock exchange quotes both “buy” and “sell” prices, the opening price shall be the “sell” price of the first settlement.
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(c) SPECIFIED DATE means,— (i) the date of vesting of the option; or (ii) any date earlier than the date of the vesting of the option, not being a date which is more than 180 days earlier than the date of the vesting. (d) EQUITY SHARE shall have the meaning assigned to it in section 85 of the Companies Act, 1956. 13. Issue of shares under Employees Stock Options Scheme to persons resident outside India — [FEMA (Transfer or Issue of Security by a person Resident Outside India) Regulations, 2000] An Indian company may issue either directly or through a Trust, shares under the Employees' Stock Options Scheme, to its employees/employees of its joint venture/ wholly owned subsidiary abroad who are resident outside India. The Scheme must comply with the regulations issued under the Securities and Exchange Board of India Act, 1992. The value of shares held by persons resident outside India must not exceed 5% of the paid-up capital of the issuing company. The issuing company must furnish a report to the Reserve Bank giving details of names of persons to whom shares are issued, number of shares issued to them and a certificate from the issuing company's Company Secretary that the SEBI regulations are complied with. RBI AP (DIR Series) Circular No. 13, dated 1-10-2004 has allowed Listed Indian companies may allot shares to their employees who are citizens of Bangladesh and Sri Lanka under Employees Stock Option Scheme. 14. Procedure for issuance of shares under ESOP 1. Hold a Board meeting to pass a resolution for: (a) approving the employee stock option plan; (b) approving the notice of general meeting to be conducted for passing the special resolution for grant of option to employees under ESOP Scheme; (c) constitution of compensation committee for administration and superintendence of the ESOS 2. Compensation committee shall be a committee of the Board of directors consisting of a majority of independent directors. [Clauses 5.1 & 5.2] 3. In case of listed companies intimation shall be given to the stock exchanges where the shares of the company are listed about the Board meeting in which the matter of grant of option is to be considered and after the meeting shall be informed of the decision taken by the Board. 4. Do not offer ESOS unless the disclosures, as specified in Schedule IV, are made by the company to the prospective option grantees. [Clause 5.1] 5. The explanatory statement to the notice and the resolution proposed to be passed in general meeting for ESOS shall, inter alia, contain the following information: (a) the total number of options to be granted; (b) identification of classes of employees entitled to participate in the ESOS; (c) requirements of vesting and period of vesting; (d) maximum period (subject to Clause 9.1) within which the options shall be vested; (e) exercise price or pricing formula; (f) exercise period and process of exercise; (g) the appraisal process for determining the eligibility of employees to the ESOS; (h) maximum number of options to be issued per employee and in aggregate; (i) a statement to the effect that the company shall conform to the accounting policies specified in Clause 13.1; (j) the method which the company shall use to value its options whether fair value or intrinsic value; (k) the following statement;
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6. 7. 8.
9.
10.
11.
12. 13. 14. 15. 16. 17.
18.
19. 20.
21.
‘In case the company calculates the employee compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed in the Directors’ Report and also the impact of this difference on profits and on EPS of the company shall also be disclosed in the Directors’ Report.’ Hold the General meeting and obtain approval of shareholders by way of special resolution authorizing issue of securities to employees under the ESOS. (Appendix 1) Send full details of resolution passed to each stock exchange where the securities are listed. The Company shall appoint a registered Merchant Banker for the implementation of ESOS as per the guidelines till the stage of framing the ESOS and obtaining in-principal approval from the stock exchanges. Approval of shareholders by way of separate resolution in the general meeting shall be obtained by the company in case of: (a) grant of option to employees of subsidiary or holding company; and (b) grant of option to identified employees, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of option. [Clause 6.3] In case of a listed company: (a) forward three copies of the notice sent to the shareholders to the stock exchanges where securities of company are listed. (b) forward promptly a copy of the proceedings of the general meeting to the stock exchanges. File a special resolution passed by the company in e-Form 23 electronically along with a certified copy of the special resolution and explanatory statement within 30 days from the date of such resolution, with the Registrar. Obtain in principle approval for listing of new shares under ESOP from all the concerning stock exchanges. A list of options exercised by employees will be prepared. Shares offered under ESOS shall be locked-in for a one year between the grant of options and vesting of option. A Board meeting shall be convened for passing resolution for allotment of shares and after the allotment, a return of allotment is filed with the ROC in e-Form 2 within 30 days. In case of listed company give intimation to the CDSL/NSDL for Corporate Action. The company may by special resolution in a general meeting vary the terms of ESOS offered pursuant to an earlier resolution of a general body but not yet exercised by the employee provided such variation is not prejudicial to the interests of the option holders. [Clause 7.2] The notice for passing special resolution for variation of terms of ESOS shall disclose full details of the variation, the rationale therefor, and the details of the employees who are beneficiary of such variation. [Clause 7.4] Employee to whom the option is granted shall only be entitled to exercise the option. It is not transferable. [Clause 11.1] Under the cashless system of exercise, the company may itself fund or permit the empanelled stock brokers to fund the payment of exercise price which shall be adjusted against the sale proceeds of some or all the shares, subject to the provision of the Companies Act. [Clause 11.2(b)] 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 has been implemented in accordance with these guidelines and in accordance with the resolution of the company in the general meeting. [Clause 14.1]
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22. The shares arising pursuant to an ESOS shall be listed immediately upon exercise in any recognized stock exchange where the securities of the company are listed subject to compliance of the following: (a) The ESOS is in accordance with these Guidelines. (b) In case of an ESOS the company has also filed with the concerned stock exchanges, before the exercise of option, a statement as per Schedule V and has obtained in-principle approval from such Stock Exchanges. (c) As and when ESOS are exercised the company has notified the concerned Stock Exchanges as per the statement as per Schedule VI. [Clause 22.1] 23. The listed company shall file the ESOS Schemes through EDIFAR filing. 24. For more detail refer ESOPs Guidelines available on www.sebi.gov.in. 15. What are Stock Purchase Plans? Stock Purchase Plans are generally used in listed Companies, wherein the employees are given the right to acquire shares of the company at a price lower than the prevailing market price. The discount could vary from 5% to 25% and is expected to act as a sufficient incentive for the employee to acquire the stock, thereby creating ownership attitudes and a focus towards corporate performance. 16. Salient features of SEBI — ESPS Guidelines 1. ESPS schemes of listed companies must be issued and administrated strictly in accordance with SEBI guidelines. 2. Options can be granted only to eligible permanent employees of the Company but excluding (i) employees belonging to promoter group and (ii) Directors holding 10% or more of capital base either directly or with relatives. 3. In case the ESOP scheme is offered to employee of Holding or Subsidiary Company or to some identified employees, then a separate resolution must be passed at the shareholders meeting. [Clause 17.5] 4. In a case where shares are allotted by a company under a ESPS in lieu of shares acquired by the same person under an ESPS in another company which has merged or amalgamated with the first mentioned company, the lock in period already undergone in respect of shares of the transferor company shall be adjusted against the lock-in required under this clause. [Clause 18.2 Proviso] 5. Shares issued under an ESPS shall be locked in for a minimum period of one year from the date of allotment. [Clause 18.2] 6. The company shall have the freedom to determine price of shares to be issued under an ESPS, provided they conform to the provisions of clause 19.2. 7. If the 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 employee pursuant to ESPS shall not be subject to any lockin. [Clause 18.3] 8. The Directors’ Report should contain following disclosure as stated in Clause 19.1 of SEBI Guidelines: (a) the details of the number of shares issued in ESPS; (b) the price at which such shares are issued; (c) employee-wise details of the shares issued to: (i) senior managerial personnel; (ii) any other employee who is issued shares in any one year amounting to 5% or more shares issued during that year; (iii) identified employees who were issued shares during any one year equal to or exceeding 1% of the issued capital of the company at the time of issuance; (d) diluted Earning Per Share (EPS) pursuant to issuance of shares under ESPS; and (e) consideration received against the issuance of shares.
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17. Eligibility to participate in Employee Stock Option/Purchase [Clauses 4 and 16] (a) An employee shall be eligible to participate in ESOS/ESPS of the company. (b) An employee who is a promoter or belongs to the promoter group shall not be eligible to participate in the ESOS/ESPS. (c) A director who either by 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 shall not be eligible to participate in the ESOS/ESPS. 18. ESOS/ESPS through Trust Route In case of ESOS/ESPS administered through a Trust, the accounts of the company shall be prepared as if the company itself is administering the ESOS/ESPS. [Clause 22A] 19. Procedure for issuance of shares under ESPS 1. Hold a Board meeting to pass a resolution for: (a) approving the ESP scheme; (b) notice of general meeting to be conducted for passing the special resolution for issuances of shares under ESP Scheme. 2. In case of listed companies intimation shall be given to the stock exchanges where the shares of the company are listed about the Board meeting in which the matter for issuances of shares under ESP Scheme is to be considered and after the meeting shall be informed of the decision taken by the Board. 3. The explanatory statement to the notice shall specify: (a) the price of the shares and also the number of shares to be offered to each employee; (b) the appraisal process for determining the eligibility of employee for ESPS; (c) total number of shares to be issued. 4. Hold the General meeting and obtain approval of shareholders by way of special resolution authorizing issue of securities to employees under the ESPS. 5. The special resolution shall state that the company shall conform to the accounting policies specified in Clause 19.2 of the Guidelines. [Clause 17.4] 6. Send full details of resolution passed to each stock exchange where the securities are listed. 7. Approval of shareholders by way of separate resolution in the general meeting shall be obtained by the company in case of: (a) allotment of shares to employees of subsidiary or holding company, and (b) allotment of shares to identified employees, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of allotment of shares. [Clause 17.5] 8. In case of a listed company: (a) forward three copies of the notice sent to the shareholders to the stock exchanges where securities of company are listed; (b) forward promptly a copy of the proceedings of the general meeting to the stock exchanges. 9. The Company shall appoint a registered Merchant Banker for the implementation of ESOS as per the guidelines till the stage of framing the ESOS and obtaining in principal approval from the stock exchanges. 10. File a special resolution passed by the company in e-Form 23 electronically along with a certified copy of the special resolution and explanatory statement within 30 days from the date of such resolution, with the Registrar. 11. Obtain in principle approval for listing of new shares under ESPs from all the concerning stock exchanges.
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12. Shares issued under ESPS shall be locked-in for a one year in for a minimum period of one year from the date of allotment. [Clause 18.2] 13. A Board meeting shall be convened for passing resolution for allotment of shares and after the allotment, a return of allotment is filed with the ROC in e-Form 2 within 30 days. 14. In case of listed company give intimation to the CDSL/NSDL for Corporate Action. 15. The shares issued under ESPS shall be listed immediately upon exercise in any recognized stock exchange where the securities of the company are listed subject to compliance of the following: (a) The ESPS is in accordance with these Guidelines. (b) As and when ESPS are exercised the company has notified the concerned Stock Exchanges as per the statement as per Schedule VI. [Clause 22.1] 16. The listed company shall file the ESPS Schemes through EDIFAR filing. 17. For more detail refer ESPSs Guidelines. 20. Case study Mastek Limited in terms of the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999, framed a Stock Option Scheme under which the eligible employees of the company and its wholly owned subsidiaries have been granted Stock Options. The options granted to the employees under the Scheme have vesting period from one to four years, with the first vesting taking place one year after the date of the Grant. On vesting of the Options, the Employees can exercise the same by applying for Equity Shares at the Price mentioned in the Option grant letter. The Board of directors and shareholders of Mastek had, during October/November, 2007, approved a scheme of Buy back of shares through open market mechanism and accordingly the Company is in the process of buying back shares from the open market as per the terms and conditions specified in the scheme. 20.1 Whether the Company can allot shares against the stock options already vested in the employees as subsisting liabilities during the buyback period, or alternatively can it extend the 90 days window as specified in ESOP scheme drawn in pursuance to SEBI ESOP guidelines, till the buyback is completed? As per SEBI’s clarification it may be noted that the Buy Back Regulations set out by notification in the official gazette, Govt. of India, have overriding effect upon the ESOP guidelines. As per the provisions laid down in regulation 19(1)(b) of the Buy Back Regulations, 1998 a company shall not issue any shares or other specified securities including by way of bonus till the date of closure of the offer. In terms of section 77A of the Companies Act, “specified securities” include employee stock options also. Thus, the said regulation 19(1)(b) restricts the company to issue shares under the Employee Stock Options Scheme also till the closure of the buy back offer. 20.2 Whether the Company can extend the tenure of the options till the conclusion of buyback, which are expiring during the buyback period or alternatively extend the 90 days windows for exercised options? “90 day window” means the period within which the company completes the process of allotment of shares under its ESOS, i.e., the period of three months from the date of receipt of papers validly exercising the options. Accordingly, it is understood that the “90 day window” commences only after an employee has validly exercised the options. As per clause 7.2 of the SEBI (ESOS & ESPS) Guidelines – “A company may by special resolution in a general meeting vary the terms of ESOS offered pursuant to an earlier resolution of a general body but not yet exercised by the employee provided such variation is not prejudicial to the interests of the option holders.” Thus, in terms of clause 7.2, the terms of ESOS of a company can be varied by the company by way of a special resolution in a general meeting, only if—(i) the options under the ESOS have not been exercised by the employees, and (ii) such variation is not prejudicial to the interests of the option holders.
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In view of the above, as regards queries it is opined that extending the tenure of options or period within which shares shall be allotted upon exercise of options, amounts to variation in the terms of ESOS. Therefore, the company shall be required to comply with the provisions of clause 7.2 of the SEBI (ESOS & ESPS) Guidelines. However, variation in terms of clause 7.2 is restricted to options which have not been exercised. 20.3 Whether the Company can issue stock option grant letters to the employees during the buyback offer and within a period of six months from the conclusion of the buyback offer, where the stock options would vest, only after the conclusion of the Buyback process and six months thereafter? SEBI’s Clarification It may be noted that as per section 77A(8) of the Companies Act, 1956, which provides that where a company completes a buy-back of its shares or other specified securities under this section, it shall not make further issue of the same kind of shares or other specified securities within a period of six months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes ……..” –does not explicitly prohibit the company to issue stock option grant letters to the employees during the buyback offer. However, the stock options/conversion would vest/happen only after the conclusion of the Buyback. Further 19(1)(b) of the SEBI (Buyback of Securities) Regulations, 1998, which restricts the company to issue any shares or other specified securities including Employee Stock Options, during the period the buyback offer is open, also does not cover the issuance of stock option grant letters to the employees during the buyback offer and within a period of six months from the conclusion of the buyback offer as long as the conversion of stock option does not take place during buy-back period. Nucleus Software Exports Ltd, (NSEL) a listed company contemplated to device an employee share option plan (ESOP), in compliance with the SEBI (ESOP & ESPS) Guidelines, 1999. The company wanted to have an employee welfare trust to grant option to eligible employees. For such purpose, the company desired to appoint independent directors of the company as trustees of such trust. Clause 22A of the SEBI (ESOP & ESPS) Guidelines, inter alia, states that in case of ESOP/ESPS administered through a trust, the account of the company shall be prepared as if the company itself is administering the ESOP/ESPS. In view of the above provision, the company has sought clarification with respect to: 20.4 Should the transaction of the trust be reflected in the financials of the company as if these have been carried out by the company itself and the account of the trust to be consolidated with the company financials? Should the transaction of the trust be reflected as being done by a separate entity, independent of the company financials? Can the company grant options to such independent directors under ESOP who will be acting as trustees to the trust? SEBI’S View Clause 22A of the SEBI (ESOP) Guidelines, 1999, states that "In case of ESOS/ESPS administered through a trust, the account of the company shall be prepared as if the company itself is administering the ESOS/ESPS". From the above it is clear that company in its separate financial statements should reflect the transaction, which are being carried out by the trust in relation to the ESOP scheme, as if these have been carried out by the company itself. Sub-clause (1) of clause 4 of the SEBI (ESOS & ESPS) Guidelines, 1999, allows the employees to participate in ESOS of the company. Further, sub-clauses (2) and (3) of clause 4 state that the following persons are not eligible to participate in the ESOS: (a) An employee who is promoter or belongs to the promoter group; and (b) A director who either by 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. Thus, it is clear that the company is not specifically prohibited from allotting option to the independent directors of the issuer company who are acting as trustees of the trust.
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Appendix 1 Specimen of Special Resolutions for issuance of shares under ESOP Scheme I. Specimen 2 (i) Specimen of special resolution to issue equity shares to the employees of the Company under the Employees Stock Option Scheme of the Company RESOLVED THAT pursuant to the provisions of Section 81(1A) and all other applicable provisions, if any, of the Companies Act, 1956 (“the Act”), and in accordance with the provisions of the Memorandum and Articles of Association of the Company, provisions of the Securities and Exchange Board of India (Employees Stock Option Scheme and Employees Stock Purchase Scheme) Guidelines, 1999 (“the ESOP Guidelines”) [including any statutory modification(s) or re-enactment of the Act or the ESOP Guidelines for the time being in force], the Listing Agreement entered into with the Stock Exchanges where the securities of the Company are listed or other relevant authority, from time to time, to the extent applicable and subject to such other conditions and modifications as may be prescribed or imposed while granting such approvals, permissions and sanctions, which may be agreed to by the Board of Directors of the Company (hereinafter referred to as “the Board” which term shall be deemed to include any Committee including Remuneration & Compensation Committee which the Board may constitute to exercise its powers, including the powers, conferred by this resolution), the Board be and is hereby authorized to create, offer, issue and allot at any time to or to the benefit of such person(s) who are in employment of the Company and its subsidiaries, including Directors of the Company, whether working in India or abroad or otherwise, except the Promoter Directors, under the Employee Stock Option Scheme, 2008 (hereinafter referred to as the “ESOP Scheme, 2008”], such number of equity shares and/or equity linked instruments (including Options/Warrants), and/or Restricted Stock Units (RSU’s) exercisable into equity shares, and/or any other instruments or securities (hereinafter collectively referred to as “Securities”) which shall not exceed five percent of the issued equity shares of the Company as on the date of grant of option(s) convertible into equivalent number of Securities, at such price, in one or more tranches and on such terms and conditions as may be fixed or determined by the Board/Committee. RESOLVED FURTHER THAT the said Securities may be granted/allotted directly to such employees/directors of the Company in accordance with the ESOP Scheme, 2008 framed and tabled before the Board or ESOP Scheme 2008 framed through a trust which may be set up by the Board/Committee of Directors of the Company in any permissible manner. RESOLVED FURTHER THAT the issue of Securities to any non-resident employee(s), non-resident Director(s) shall be subject to such approvals, permissions or consents as may be necessary from Reserve Bank of India or any other relevant authority in this regard. RESOLVED FURTHER THAT the new equity shares to be issued and allotted by the Company in the manner aforesaid shall rank pari passu in all respects with the existing equity shares of the Company. RESOLVED FURTHER THAT the Company shall conform to the accounting policies prescribed from time to time under the ESOP Guidelines. RESOLVED FURTHER THAT the Board be and is hereby authorized to take necessary steps for listing of the Securities allotted upon exercise under the ESOP Scheme, 2008, on the stock exchanges where the Company’s shares are listed as per the terms and conditions of the listing agreement entered into with the stock exchanges and other applicable guidelines, rules and regulations. RESOLVED FURTHER THAT for the purpose of giving effect to any creation, offer, issue or allotment or listing of the Securities under the ESOP Scheme, 2008 or through trust, the Board/Committee be and is hereby authorized on behalf of the Company to evolve, decide upon and bring in to effect and make any modifications, changes, variations, alterations or revisions in the said ESOP Scheme, 2008 or to suspend, withdraw or revive the ESOP Scheme, 2008 from time to time as per the discretion of the Board/Committee and to do all such acts, deeds, matters and things as it may in its absolute discretion deem fit or necessary or desirable for such purpose and with power on behalf of the Company to settle any issues, questions, difficulties or doubts that may arise in this regard without requiring the Board/Committee to secure any further consent or approval of the shareholders of the Company. (ii) Specimen of special resolution to issue equity shares to the employees of the subsidiaries of the Company under the Employees Stock Option Scheme of the Company RESOLVED THAT pursuant to the provisions of Section 81(1A) and all other applicable provisions, if any, of the Companies Act, 1956 (“the Act”), and in accordance with the provisions of the Memorandum and Articles of Association of the Company, provisions of the Securities and Exchange Board of India (Employees Stock Option
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Scheme and Employees Stock Purchase Scheme) Guidelines, 1999 (“the ESOP Guidelines”) [including any statutory modification(s) or re-enactment of the Act or the ESOP Guidelines for the time being in force], the Listing Agreement entered into with the Stock Exchanges where the securities of the Company are listed or other relevant authority, from time to time, to the extent applicable and subject to such other conditions and modifications as may be prescribed or imposed while granting such approvals, permissions and sanctions, which may be agreed to by the Board of Directors of the Company (hereinafter referred to as “the Board” which term shall be deemed to include any Committee including Remuneration & Compensation Committee which the Board may constitute to exercise its powers, including the powers, conferred by this resolution), the Board is be and hereby authorized to create, offer, issue and allot at any time to or to the benefit of such person(s) who are in permanent employment of the Subsidiary Company(ies), including Directors of the Subsidiary Company(ies), whether working in India or abroad or otherwise, except the Promoter Directors, under the Employee Stock Option Scheme, 2008 (hereinafter referred to as the “ESOP Scheme, 2008”], such number of equity shares and/or equity linked instruments (including Options/Warrants), and/or Restricted Stock Units (RSU’s) exercisable into equity shares, and/or any other instruments or securities (hereinafter collectively referred to as “Securities”) (subject to the ceiling referred to in resolution 9 above) which shall not exceed five percent of the issued equity shares of the Company as on the date of grant of option(s) convertible into equivalent number of Securities including permanent employees of the Company, at such price, in one or more tranches and on such terms and conditions as may be fixed or determined by the Board/Committee. RESOLVED FURTHER THAT the said Securities may be granted/allotted directly to such employees/directors of the Company in accordance with the ESOP Scheme, 2008 framed as tabled before the Board or ESOP Scheme, 2008 framed through a trust which may be set up by the Board/Committee of Directors of the Company in any permissible manner. RESOLVED FURTHER THAT the issue of Securities to any non-resident employee(s), non-resident Director(s) shall be subject to such approvals, permissions or consents as may be necessary from Reserve Bank of India or any other relevant authority in this regard. RESOLVED FURTHER THAT the new equity shares to be issued and allotted by the Company in the manner aforesaid shall rank pari passu in all respects with the existing equity shares of the Company. RESOLVED FURTHER THAT the Company shall conform to the accounting policies prescribed from time to time under the ESOP Guidelines. RESOLVED FURTHER THAT the Board be and is hereby authorized to take necessary steps for listing of the Securities allotted upon exercise under the ESOP Scheme, 2008, on the stock exchanges where the Company’s shares are listed as per the terms and conditions of the listing agreement with the stock exchanges and other applicable guidelines, rules and regulations. RESOLVED FURTHER THAT for the purpose of giving effect to any creation, offer, issue or allotment or listing of the Securities under the ESOP Scheme, 2008 or through trust, the Board/Committee be and is hereby authorized on behalf of the Company to evolve, decide upon and bring in to effect and make any modifications, changes, variations, alterations or revisions in the said ESOP Scheme, 2008 or to suspend, withdraw or revive the ESOP Scheme, 2008 from time to time as per the discretion of the Board/Committee and to do all such acts, deeds, matters and things as it may in its absolute discretion deem fit or necessary or desirable for such purpose and with power on behalf of the Company to settle any issues, questions, difficulties or doubts that may arise in this regard without requiring the Board/Committee to secure any further consent or approval of the shareholders of the Company. Explanatory Statement The Board has identified the need to reward the permanent employees of the Company including employees of the subsidiary companies and to enable them to participate in the growth and financial success of the company. In view of the above, the Board has formulated a Scheme in accordance with the ESOP Guidelines, 1999 to offer securities to the employees (including employees of the subsidiary companies) under the “Employee Stock Option Scheme, 2008” (ESOP Scheme, 2008). The Board has accordingly decided to seek approval of the shareholders of the Company. Disclosures as per Regulation 6.2 of the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 as amended:
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Sr. No. 1.
Particulars
Disclosures
Total no. of Options /Shares/Securities that could be issued under the Scheme.
Up to five percent (5%) of the aggregate of the number of issued equity shares of the Company, from time to time, on the date(s) of grant of such Securities to eligible employees (or such other adjusted figure for any bonus, stock splits or consolidations or other reorganization of the capital structure of the Company as may be applicable from time to time).
2.
Identification of classes of employees entitled to participate in the ESOP
All employees of the Company and Subsidiary Companies, including Directors (including Whole-time Director) of the Company and its subsidiaries and as may be decided by the Remuneration & Compensation Committee constituted for the purpose.
3.
Vesting, requirement of Vesting and maximum period of vesting
The vesting period shall commence on the expiry of one year from the date of grant of Securities, and may extend up to 3 years from the date of vesting or such further or other period as the Board/Committee may determine, from time to time. The Securities would vest subject to continued employment with the Company or its subsidiaries. In addition to this, the Board/Committee may specify performance criteria/conditions to be met subject to which securities would vest in the employee. The Securities may vest in tranches subject to the terms and conditions stipulated by the Remuneration & Compensation Committee.
4.
Exercise Price or Pricing formula
The Securities would be issued at a market price (Exercise Price), which would be the latest available closing price on the Stock Exchange, which records the highest trading volume in the Company’s equity shares on the date prior to the date of the meeting of the Board/Remuneration & Compensation Committee at which the Securities are granted or at such price as the Board/Remuneration & Compensation Committee may determine.
5.
Exercise Period and the Process of Exercise
The exercise period will commence from the date of vesting and will expire not later than 3 years from the date of the vesting of the Securities or such other period as may be decided by the Remuneration & Compensation Committee, from time to time.
6.
Appraisal process for determining the eligibility of the employees for ESOP
The appraisal process for determining the eligibility of the employees will be in accordance with the ESOP Scheme, 2008 or as may be determined by the Remuneration & Compensation Committee at its sole discretion.
7.
Maximum number of options/shares/securities to be issued per employee and in the aggregate
The maximum number of Securities granted to any employee including Directors of the Company in any one year will not exceed 1% of the issued equity share capital (excluding outstanding warrants and conversions) of the Company.
8.
Disclosure Accounting policies
The Company will comply with the disclosure and accounting policies, as applicable. In case the Company calculates the employee compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used fair value of the options shall be disclosed in the Director’s Report and also the impact of this difference on profits and Earning Per Share (EPS) of the Company shall also be disclosed in the Director’s Report.
and
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In terms of the provision of Section 81(1A) and other applicable provisions, if any, of the Companies Act, 1956 and ESOP Guidelines, 1999, approval of the shareholders is sought to issue the Securities, pursuant to the Securities granted under the ESOP Scheme, 2008, not exceeding in aggregate, five percent of the number of issued equity shares of the Company, from time to time, as on the date(s) of grant of securities under the ESOP Scheme, 2008. The Board recommends the resolution as set out in item no. 9 & 10 of the Notice for your approval. All of the Directors, except Mr. DKJ, Managing Director of the Company may be deemed to be interested in the resolution to the extent of benefit they may derive under the ESOP Scheme 2008.
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