Structured Biiz

Employee Stock Option Plan (ESOP)

Employee Stock Option Scheme (ESOP) is a scheme or option given to the employees of the company to purchase the stock of the Company at a future date at a pre-determined price. ESOP is a kind of employee benefit plan. ESOP is a tool used by a Company to retain its employees and get them awarded for being associated with the Company. The Company issuing ESOP needs to comply with the Companies Act, 2013 and the rules framed thereunder.

What are the objectives of issuing ESOP?

Definition of Employee Stock Option

Under Section 2 (37) of the Companies Act, 2013, the “Employees’ Stock Option” means the option given to the directors, officers or employees of a Company or 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 Provisions for Listed & Unlisted Companies

The Companies Act, 2013 (the “Act”) and the rules framed thereunder describes the provisions for the issue of Employee’s Stock Options by Unlisted Companies. Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 (“Rules”) governs the issuance of ESOP. 

Listed Companies issuing ESOP needs to comply with the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014.

ESOP Process followed by Unlisted Companies

Rule 12(1) defines employees as:

– A permanent employee of the company who is working in India or outside India.

– A Director of the Company, including a whole-time or part-time director but not an independent director.

– A permanent employee or director of a Subsidiary Company in India or outside India, or Holding Company, or an Associate Company.

A Company cannot issue ESOP to the following employees:

– An employee who is belonging to the Promoter group or is a Promoter of the Company.

– A director who either himself or through any body corporate or through his relative holds more than ten percent of the outstanding equity shares of the Company, whether directly or indirectly.

However, the above two conditions do not apply to a Startup Companies for a period of 10 (Ten) years from the date of its incorporation or registration.

The Employees Stock Option Scheme needs to be approved by the shareholders of the Company by passing a Special Resolution.

The Company shall make the following disclosures in the explanatory statement annexed to the notice for passing of the resolution and file the same in a prescribed e-form:

  1. the total number of stock options to be granted;
  2. identification of classes of employees entitled to participate in the Employees Stock Option Scheme;
  3. the appraisal process for determining the eligibility of employees to the Employees Stock Option Scheme;
  4. the requirements of vesting and period of vesting;
  5. the maximum period within which the options shall be vested;
  6. the exercise price or the formula for arriving at the same, the exercise period and process of exercise;
  7. the Lock-in period, if any;
  8. the maximum number of options to be granted per employee and in aggregate;
  9. the method which the company shall use to value its options;
  10. the conditions under which option vested in employees may lapse e.g. in case of termination of employment for misconduct;
  11. 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 an employee; and
  12. a statement to the effect that the Company shall comply with the applicable Accounting Standards.

The Companies granting the option to its employees pursuant to Employees Stock Option Scheme will have the freedom to determine the exercise price in conformity with the applicable Accounting Policies, if any.

The approval of shareholders by way of a separate resolution shall be obtained by the Company in case of:

  1. grant of the option to employees of a Subsidiary or Holding Company; or
  2. grant of the option to identified employees, 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 of the option.

The Company may by special resolution, vary the terms of the Employees Stock Option Scheme not yet exercised by the employees, provided such variation is not prejudicial to the interests of the option holders.

The notice for passing the special resolution for variation of terms of Employees Stock Option Scheme shall disclose full of the variation, the rationale, therefore, and the details of the employees who are beneficiaries of such variation.

(a) There shall be a minimum period of one year between the grant of options and vesting of the option.

(b) The company can specify the lock-in period for the shares issued pursuant to the exercise of the option.

(c) The Employees shall not have the right to receive any dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to them, till shares are issued on exercise of the option.

The amount, if any, payable by the employees, at the time of grant of option: 

  1. may be forfeited by the company if the option is not exercised by the employees within the exercise period; or
  2. the amount may be refunded to the employees if the options are not vested due to non-fulfilment of conditions relating to vesting of option as per the Employees Stock Option Scheme.
  1. The option granted to employees shall not be transferable to any other person.
  2. The option granted to the employees shall not be pledged, hypothecated, mortgaged, or otherwise encumbered or alienated in any other manner.
  3. In the event of the death of an employee while in employment, all the options granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.
  4. Except in the event of demise of an employee while in employment, no person other than the employees to whom the option is granted shall be entitled to exercise the option.
  5. In case the employee suffers a permanent incapacity while in employment, all the options granted to him as on the date of permanent incapacitation shall vest in him on that day.
  6. In the event of resignation or termination of employment, all options not vested in the employee as of that day shall expire. However, the employee can exercise the options granted to him which are vested within the period specified in this behalf, subject to the terms and conditions under the scheme granting such options as approved by the Board.

The Board of directors shall 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 the 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 key managerial personnel; any other employee who receives a grant of options in any (1) one year of option amounting to 5 (five) percent or more of options granted during that year; identified employees who were granted an option, during any one year, equal to or exceeding 1 (One) percent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant;

  1. The Company shall maintain a Register of Employee Stock Options in prescribed Form and shall forthwith enter therein the particulars of option granted.
  2. The Register of Employee Stock Options shall be maintained at the registered office of the company or such other place as the Board may decide.
  3. The entries in the register shall be authenticated by the Company Secretary of the Company or by any other person authorised by the Board for the purpose.
  4. Requisite forms are required to be filed with the concerned Registrar of Companies.

Important points to be remember