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ESOPs: The Legal angle

What is Employees’ Stock Option?

It is an option given to the directors, officers or employees of a company or of its holding company(ies) or subsidiary company(ies), 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.

Who can issue ESOPs? A company can issue ESOPs to –

  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.

If it is a DIPT-registered company, it can issue ESOPs to –

  1. an employee who is a promoter or a person belonging to the promoter group;

  2. or 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.

Compliances required by the company –

  1. The company can issue ESOPs until 10 years have elapsed from the date of incorporation/registration of the company.

  2. The company should get the issue of ESOP scheme approved by the shareholders of the company by passing a special resolution.

  3. The company should make the following disclosures in the explanatory statement annexed to the notice for the passing of the resolution –

    1. the total number of stock options to be granted;

    2. identification of classes of employees entitled to participate in the Scheme;

    3. the appraisal process for determining the eligibility of employees;

    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;

    7. the exercise period and process of exercise;(h) 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 the employee; and

    12. a statement to the effect that the company shall comply with the applicable accounting standards.

  4. The company can determine the exercise price of ESOP in conformity with the applicable accounting policies.

  5. In case of grant of an option to employees of a subsidiary or holding company; or grant of an option to identified employees, during any one year, equal to or exceeding one percent of the issued capital of the company at the time of grant of the option, take the approval of shareholders by way of separate resolution.

  6. If the company wants to vary the terms of the ESOP, you can do so by passing a special resolution (and ensure investor approval if it is in the affirmative list in investment documents). This resolution should disclose fully the variation, the reason of variation, and details of the employees who are beneficiaries of such variation.

  7. There has to be a minimum one-year gap between the grant of options and vesting of options.

  8. The company can decide the lock-in period for the shares issued when an employee decides to exercise the option.

  9. Until shares are issued to the employees in the exercise of the option, they do not have the right to receive any dividend, or to vote, or enjoy the benefits of a shareholder in respect of the option granted to them.

  10. If the employee does not exercise the option within the exercise period, the company may forfeit the amount paid (if any) by the employee at the time of grant of the option

  11. If the options are not vested due to non-fulfillment of conditions relating to vesting of option as per the Employees Stock Option Scheme, the Company may refund the amount paid (if any) by the employee at the time of grant of the option

  12. Certain conditions which need to be taken care of post-grant of option –

    1. The option granted to employees cannot be transferable to any other person.

    2. Neither it should 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.

    4. However, if the employee to whom the options were granted dies during the employment, all the options granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.

    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 on that day shall expire.

  13. The Board of directors should disclose in the Directors’ Report for the year, the following details of the Employees Stock Option Scheme:

    1. options granted;

    2. options vested;

    3. options exercised;

    4. the total number of shares arising as a result of the exercise of option;

    5. options lapsed;

    6. the exercise price;

    7. variation of terms of options;

    8. money realized by exercise of options;

    9. total number of options in force;

    10. employee wise details of options granted to:

      1. key managerial personnel

      2. 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

      3. identified employees who were granted the 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;

  14. The company should maintain a Register of ESO in Form No. SH.6. Enter in it the particulars of the option. The Register should be maintained at the registered office of the company or any place as the Board may decide. The entries in the register should be authenticated by the company secretary of the company or by any other person authorized by the Board for the purpose.


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