Frequently Asked Questions (FAQs) on Employee Stock Options Scheme
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1. What is the ESOS ?
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A compensation package for the key employees of a company should be designed to attract, motivate, and retain the people who can help the business succeed. Deferred compensation can be used as a technique of encouraging the top employees to remain with the company by combining a delayed vesting arrangement with a deferred compensation plan. An organization committed to being a high-performing organization, aims at encouraging every individual to raise his/her level of performance so as to ensure that the individual efforts combine to maximize both corporate performance and shareholder value. Universally, these objectives are aimed to be achieved through the use of a very potent instrument, namely the Equity Stock Option Scheme (ESOS).
Employees' stock options are one of the most exciting and innovative ways, developed in the post-liberalization period, by which a company can design a compensation package that helps it to achieve these goals at the lowest possible cost. Establishing a successful share scheme and tailoring it to a particular company's needs is a challenge. Under a well-designed scheme, there can be major benefits for both the company and its employees.
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| 2. What is the purpose of the ESOS ? |
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The purpose of Employee Stock Options Scheme (ESOS) is to advance the interests of the company and its shareholders by offering to those employees of the company who will be responsible for the long-term growth of the company’s earnings the opportunity to acquire or increase their equity interests in the company, thereby achieving a greater commonality of interest between shareholders and employees, enhancing the Company’s ability to retain and attract highly qualified employees and providing an additional incentive to such employees to achieve the Company’s long-term business plans and objectives.
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3. What are the benefits of ESOS ?
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The benefits of ESOS/ESPS to employees are that they are given a chance to become the shareholders of the company at a discounted price to the market price. Thus the employees are given a chance to share the profits of the company by making them shareholders.
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4. How will the scheme be exercised ?
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The company will constitute a Compensation Committee for administration and superintendence of the ESOS. It will be a Committee of the Board of Directors consisting of a majority of independent directors. The Committee shall formulate the terms and conditions of the ESOS like
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The quantum of option to be granted per employee and in aggregate.
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The conditions under which the option vested in employee may lapse
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In case of termination of employment for misconduct
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The time period within which the option is to be exercised in case of termination or resignation of an employee
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The right of an employee to exercise the options
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The procedure for making a fair and reasonable adjustment to number of options and to the exercise in case of rights issues bonus issues and other actions
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The grant, vest and exercise of options in case of employees who are on long leave
- The procedure for cashless exercise of options
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No Scheme will be offered unless the shareholders of the company approve it by passing a special resolution in the general meeting.
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| 5. Requirement of Separate resolution ? |
It will be required in case of
- Grant of option to employees of subsidiary or holding company and,
- 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.
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| 6. Can there be any variation in terms of ESOS ? |
- The company shall not vary the terms of ESOS in any manner that may be detrimental to he interests of the employees.
- 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. These shall apply to such variations of terms as they do to the original grant of option.
- The notice for passing special resolution for variation of terms of ESOS shall disclose full details of the variation, the rationale therefore, and the details of the employees who are beneficiary of such variation.
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| 7. What will be the effect of the scheme on the rights of the employee ? |
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The employee shall not have right to receive any dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to him, till shares are issued on exercise of option.
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| 8. Other Legal Aspects ? |
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The Board of Directors shall at each annual general meeting before the shareholders a certificate from the auditors of the company that the scheme has been implemented in accordance with the SEBI guidelines and in accordance with the resolution of the company in the general meeting.
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| 9. Will there be any lock-in-period for the transfer of shares ? |
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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.
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| 10. Who is eligible ? |
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It will be applicable to all class of employees whether working in India or abroad at the discretion of the Compensation Committee. However the following classes of employees are not eligible
- A employee who is a promoter or belongs to the promoter group
- 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.
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| 11. Employee Stock Options through Trusts ? |
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Employee Stock Options are also implemented through creation of Trusts. Trusts are formed under the Indian Trust Act and registered under the relevant Trust Act of the state in which the Trust's activities are to be based. The objectives of the Trust are to administer the Scheme for the employees of a certain organization. The Company issues a certain number of shares at par to the Trust. The Trust then issues these shares to the Company employees in accordance with pre-set guidelines. Under such an arrangement, the employees receive shares from the Trust. The Trust can also buy back the shares from employees in circumstances, which may be specified in the Trust Deed. This arrangement imparts liquidity in the scheme and is suited to companies whose shares are not listed.
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| 12. What will be the Tax – Implications of the scheme ? |
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The employees are liable for Capital Gains tax at the time of sale of the shares. The taxable amount being Full value of Consideration as reduced by the Indexed Cost of Acquisition. The cost of acquisition being the amount paid for purchase of shares.
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| 13. Effect in case of certain situations ? |
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In case of 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.
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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.
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In the event of resignation or termination of the employee - all options not vested as on that day shall expire. However, the employee shall, be entitled to retain all the vested options. Option once granted to any employee shall not transferable to any person and also it cannot be pledged, hypothecated, mortgaged or otherwise alienated in any other manner
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| 14. Options outstanding at Public issue ? |
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The provisions of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines prohibiting initial public offering by companies having outstanding warrants and financial instruments shall not be applicable in case of outstanding option granted to employees in pursuance of ESOS.
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If any option is outstanding at the time of an initial public offering by a company, the promoters' contribution shall be calculated with reference to the enlarged capital that would arise on exercise of all vested options.
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If any options granted to employees in pursuance of ESOS are outstanding at the time of initial public offering, the offer document of the company shall disclose all the information required in the Director's Report.
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| 15. Accounting Policies ? |
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The options granted to the employee will be treated as employee compensation in the financial statements of the company
- The accounting value of options shall be equal to the aggregate, over all employee stock options granted during the accounting period, of the fair value of the option.
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For this purpose:
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Fair value means the option discount, or, if the company so chooses, the value of the option using the Black Scholes formula or other similar valuation method.
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Option discount means the excess of the market price of the share at the date of grant of the option under ESOS over the exercise price of the option (including up-front payment, if any)
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Where the accounting value is accounted for as employee compensation the amount shall be amortised on a straight-line basis over the vesting period.
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When an unvested option lapses by virtue of the employee not conforming to the vesting conditions after the accounting value of the option has already been accounted for as employee compensation, this accounting treatment shall be reversed by a credit to employee compensation expense equal to the amortized portion of the accounting value of the lapsed options and a credit to deferred employee compensation expense equal to the unamortized portion.
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When a vested option lapses on expiry of the exercise period, after the fair value of the option has already been accounted for as employee compensation, this accounting treatment shall be reversed by a credit to employee compensation expense.
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