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This is my third article with and this time again I am happy to contribute something on corporate law related article. ESOP is a very hot and successful instrument to retain the good manpower with the company. The ESOP can be issued by the listed company only in accordance with the guidelines made by the SEBI. Today my discussion is only on the guidelines issued by the SEBI. The discussion is based on the procedural part only and one can refer the guidelines to get the complete text. 

I have not given any definition.Please refer guidelines.

The guidelines issued by the SEBI is known as “Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme), Guidelines, 1999”.

The guidelines for issue of ESOS by a listed company may be summarized as below:

1. Eligibility

2. Compensation Committee

3. Share Holders Approvals

4. variation in terms and conditions of scheme

5. Pricing of the option

6. Lock in period 

7. Right of the option holders

8. Consequences of failure to exercise option

9. Non-transferability of option

10. Disclosure in Directors Report

11. Accounting Policies

12. Certificate from Auditors of the company

13. Options outstanding at the time of IPO

14. Listing

1. Eligibility:

a) An employee shall be eligible to participate in ESOS 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.

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.

2. Compensation Committee (CC):

a) No ESOS shall be offered unless the company constitutes a Compensation Committee for administration and superintendence of the ESOS.

b) The CC shall be a Committee of the Board of directors consisting of a majority of independent directors.

c) The CC shall, inter alia, formulate the detailed terms and conditions of the ESOS.

d)The Compensation Committee shall frame suitable policies and systems to ensure that there is no violation of Insider Trading regulation and Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market regulation by employee

3. Shareholders Approval

a) Special Resolution to be passed in the general meeting of the shareholders.

b) The explanatory statement to the notice and the resolution proposed to be passed in general meeting for ESOS shall, inter alia, contain the some information right from the number of total option to be granted and eligibility, to pricing method, to appraisal method of employees, to vesting information.

c) Shareholders separate approval is required if the option is to be granted to the employees of subsidiary or holding company.

4. Variation in terms and conditions of the scheme

a) The company can vary the terms and conditions of the scheme by passing special resolution before the exercise of the option by employee but that should not be detrimental to the interest of the employee

b) The company can reprice the options which are not yet exercised provided the repricing should not be detrimental to the interest of the company.

5. Pricing of the option:

a) The company is free to determine the exercise price of the option subject to conforming with the accounting policies given in schedule-1

6. Lock-in-Period:

a) The company shall have the freedom to specify the lock-in period for the shares issued pursuant to exercise of option subject to minimum one year statutory lock-in-period

7. Rights of the option holders in respect of Dividend and voting

a) 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.

8. Consequence of failure to exercise option

a) The amount may be forfeited by the company or refunded by the company to the employee failed to exercise the grant of option vested in him in accordance with the scheme.

9. Non-transferability of Options:

a) The option granted to an employee is not transferable, nor it can be pledged nor mortgaged nor hypothecated.

b) In the event of death of the employee while in employment, legal heirs of the deceased will be eligible.

c) In the event of termination or resignation of the employee all option not vested shall expire subject to terms formulated by CC in this regard.

10. Disclosure in the Directors Report:

a) Directors’ report should disclose the information regarding ESOS as prescribed in the clause 12 of the guidelines.

11. Accounting Policies:

a) Accounting Value is to be determined and shall be treated as employee compensation expenses in the financial statements by amortizing on a straight line method.

b) To follow the accounting system as discussed in schedule I clause no 13 of the guidelines.

12. Certificate from Auditors: A certificate from the auditors of the company that the scheme has been implemented in accordance with guidelines and the resolution of the General Meeting.

13. Options outstanding at IPO:

a) 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 o outstanding option granted to employees in pursuance of ESOS.

14. Listing:

a) 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.

b) Before the exercise of the option a statement as per Schedule V is filed and obtained the in-principal approval from exchange.

c) After the exercise of the option company shall notify the exchange a statement as per the Schedule VI.

d) For listing of shares issued pursuant to ESOS or ESPS the company shall make application to the Central Listing Authority as per SEBI (Central Listing Authority) Regulations, 2003 and obtain the in-principle approval from Stock Exchanges where it proposes to list the said shares.]

e) The existing provisions of lock-in specified in SEBI (Disclosure and Investor Protection) Guidelines 2000 shall not be applicable on the pre- initial public offering ESOS options / shares, ESPS options / shares held by employees other than promoters provided that the earlier resolution is ratified by the shareholders in General Meeting and disclosures in the prospectus for IPO is made as mentioned in clause 22.2 (i) & (ii).]

f) The ESOS / ESPS shares held by the promoters prior to Initial Public offering shall be subject to lock-in as per the provisions of SEBI (Disclosure and Investor Protection) Guidelines, 2000]

g) The listed companies shall file the ESOS or ESPS Schemes through EDIFAR filing.]

h) When holding company issues ESOS/ESPS to the employee of its subsidiary, the cost incurred by the holding company for issuing such options/shares shall be disclosed in the 'notes to accounts' of the financial statements of the subsidiary company]

i) The Company shall appoint a registered Merchant Banker for the implementation of ESOS and ESPS as per these guidelines.]

j) In case of ESOS / ESPS are administered through a Trust Route, the ESOS / ESPS Trust shall be consolidated with the company in accordance with the Accounting Standard (AS21) specified by the Institute of Chartered Accountants of India and these Guidelines shall be applicable to the consolidated entity]

Hope the members will find this article useful...


CA Yogesh Kr.Agarwal


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Yogesh Agarwal
Category Corporate Law   Report

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