Employee Stock Option Scheme u/s 2 (37) of the Companies Act, 2013

EMPLOYEE STOCK OPTION SCHEME

Meaning

The term ‘Employee Stock Option' (ESOP) has been defined under sub-section (37) of Section 2 of the Companies Act, 2013, according to which '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.

Rule 12 of Companies (Share Capital and Debentures) Rules, 2014

A company, other than a listed company, which is not required to comply with Securities and Exchange Board of India Employee Stock Option Scheme Guidelines shall not offer shares to its employees under a scheme of employees' stock option (hereinafter referred to as 'Employees Stock Option Scheme”), unless it complies with the following requirements, namely:-

the issue of Employees Stock Option Scheme has been approved by the shareholders of the company by passing a special resolution (exception in case of private company where ordinary resolution is required).

Who is an employee for the purpose of Section 62(1)(b)

1. a permanent employee of the company who has been working in India or outside India; or
2. a director of the company, whether a whole time director or not but excluding an independent director; or
3. 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 but does not include-
4. an employee who is a promoter or a person belonging to the promoter group; or
5. a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.

Conditions

Rule 12(8) states the following conditions:

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. No person other than the employees to whom the option is granted shall be entitled to exercise the option.

Disclosure in the Board's Report

Rule 12(9) states that the Board of directors, shall, inter alia, disclose in the Directors' Report for the year, the following details of the Employees Stock Option Scheme issued during the year. The details are given in chapter 'Transparency and Disclosures”, later in this study.

Maintenance of Register

The provisions of companies act states that the company shall maintain a Register of Employee Stock Options in Form No. SH.6 and shall forthwith enter therein the particulars of option granted under clause (b) of sub-section (1) of section 62.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. The entries in the register shall be authenticated by the company secretary of the company or by any other person authorized by the Board for the purpose.

Procedure for issue of securities to employees through 'Employees Stock Option Scheme”

1. Convene a Board Meeting to approve the notice of the General meeting along with special resolution, explanatory statement etc., to be approved by the shareholders through special resolution. In case of private company, it is sufficient that they obtain ordinary resolution.
2. Ensure that the company has made the following disclosures in the explanatory statement annexed to the notice for passing of the resolution-Ensure that the special resolution is filled with ROC in MGT 14 within 30 days of passing the resolution.
3. The companies granting 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.
4. The approval of shareholders by way of separate resolution shall be obtained by the company in case of-
   1. Grant of option to employees of subsidiary or holding company; or
   2. Grant of option to identified employees, during any one year, equal to or exceeding one per cent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of option.
5. The company may by special resolution, vary the terms of Employees Stock Option Scheme not yet exercised by the employees provided such variation is not prejudicial to the interests of the option holders.
6. The notice for passing 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.
7. There shall be a minimum period of one year between the grant of options and vesting of option.
8. The amount, if any, payable by the employees, at the time of grant of option-

1. Maybe 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- fulfillment of conditions relating to vesting of option as per the Employees Stock Option Scheme.
   9. The option granted to employees shall not be transferable to any other person.

1. The option granted to the employees shall not be pledged, hypothecated, mortgaged or otherwise encumbered or alienated in any other manner.
2. No person other than the employees to whom the option is granted shall be entitled to exercise the option.
3. In the event of the death of 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. 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.
5. In the event of resignation or termination of employment, all options not vested in the employee as on 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.
   10. The details to be disclosed in Board of directors should be ensured. ,
   11. The company shall maintain a Register of Employee Stock Options in Form No. SH.6 and shall enter therein the particulars of option. Such registrar shall be maintained at the registered office of the company or such other place as the Board may decide..
   12. Once the allotment is made, the company shall within 30 days of allotment, file with the Registrar are turn of allotment in Form PAS.3, along with the fee as specified in Companies (Registration of Offices and Fees) Rules, 2014.
   13. Deliver the share certificates of allotted shares within a period of 2 months from the date of allotment.
   14. Intimate the details of allotment of shares to the Depository immediately on allotment of such shares
   15. Where the equity shares of the company are listed on a recognized stock exchange, the Employees Stock Option Scheme shall be issued, in accordance with the regulations made by the Securities and Exchange Board of India in this behalf

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