EMPLOYEE STOCK OPTION SCHEME
Employee Stock Option Scheme means the option given to the Whole Time Directors, Officers and Employees of the Company which gives them a right or benefit to purchase or subscribe the securities offered by the Company at a predetermined price at a future date.
The idea behind sock option is to motivate the employees by linking the profitability of the Company.
Eligibility to participate in ESOS:-
Option shall be granted only to the eligible permanent employees of the Company subject to the following:-
An employee who is a promoter or belongs to the promoter group shall not be eligible to participate in the ESOS.
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.
Disclosure to the Grantees:-
No ESOS can be offered by the Company unless the disclosure regarding risk involve, brief of Company, Terms and Conditions of ESOS has been made to the prospective grantees.
Compensation Committee:-
No ESOS can be offered unless the company has constituted a Compensation Committee for administration and superintendence of the ESOS.
The Compensation Committee, consisting of the majority of independent directors, shall formulate the detailed terms and conditions of the ESOS.
Shareholders Approval:-
Shares can be issued under ESOS with the approval of shareholders by way of Special Resolution. The explanatory statement of the notice and the resolution proposed to be passed in general meeting shall include details regarding the ESOS.
Approval of shareholders by way of separate resolution in the general meeting shall required in case grant of option to identified employees, during any one year, equal to or exceeding 1% of the issued capital of the company.
Variation of terms of ESOS:-
The Company, by special resolution, may variate the terms, including the pricing, of the ESOS offered but not yet exercised by the employees provided such variation is not prejudicial to the interest of the option holders.
Lock in Period:-
There shall be a minimum period of one year between the grant of option and vesting of option. However the Company shall have the freedom to specify the lock in period for the shares issued pursuant to exercise of option. The employees shall not have any right to receive dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to him, till the shares are issued on exercise of option.
Non transferability of option:-
The option granted to an employee shall not be transferable to any person, the option can only be exercised by the employee to who the option is granted.
The option cannot be transferred, pledged, hypothecated, mortgaged or otherwise alienated in any manner. This is a personal right only to the offeree.
Disclosure in Directors’ Report:-
The Board of Directors shall disclose either in Directors’ Report or in the annexure to the Directors’ Report the details of ESOS.
Certificate from the Auditors:-
The Board of Directors shall place before the shareholders a certificate from the auditors of the company that the scheme has been implemented in accordance with these guidelines and in accordance with the resolution of the company in the general meeting.
Accounting Policies:-
In respect of any option granted during any accounting period, the accounting value of the option shall be treated as another form of employee compensation in the financial statements of the Company.
The accounting value of option shall be equal to aggregate, over all employee stock options granted during the accounting period, of the intrinsic value of the option or , if the company so chooses, the fair value of the option.
Where the Accounting value is accounted for as employee compensation, as above, the amount shall be amortised as under:-
- Where the scheme does not provide for graded vesting, the amount shall be amortised on a straight line basis over the vesting period.
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Where the scheme provide for graded vesting-
- The vesting period shall be determined separately for each separate vesting portion of the option, as if the option was, in substance, multiple option and the amount of employee compensation cost shall be accounted for and amortised accordingly on a straight line basis over the vesting period; or
- The amount of employee compensation cost shall be accounted for and amortised on a straight line basis over the aggregate vesting period of the entire option (i.e. over the vesting period of the last separately vesting portion of the option).
Provided that the amount of employee compensation cost recognized at any date at least equals the fair value or the intrinsic value, as the case may be, of the vested portion of the option at that date.
· 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 expenses 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.
· 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.
Determination of Exercise Price:-
Exercise price means the price payable by the employee for exercising the option granted to him. The companies will have the freedom to determine the exercise price subject to conforming to the accounting policies.
In case the company calculates the employees compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed in the Directors’ Report and also the impact of this difference on profits and on EPS of the company shall also be disclosed in the Directors’ Report.
Determination of Fair Market Value in case of Listed Companies:-
1. When the shares of the company are listed on an Indian recognized stock exchange:-
When the shares are traded on the date of vesting, FMV is the average of the opening price and the closing price on the stock exchange on the date of vesting of option in the hands of the employee.
When the shares are not traded on the date of vesting, FMV is the closing price on a date closest to the date of vesting of the option and immediately preceding such date.
2. When the shares are listed on more than one Indian recognized stock exchanges:-
When the shares are traded on the date of vesting, FMV is the average of the opening price and the closing price on the stock exchange, which records the highest volume of trading in shares, on the date of vesting of option in the hands of the employee.
When the shares are not traded on the date of vesting, FMV is the closing price on a date closest to the date of vesting of the option and immediately preceding such date which records the highest volume of trading in shares.
Tax Implications:-
If the following conditions are satisfied, value of shares allotted to employees under Employee Stock Option Scheme will be taxable in the hands of employee:-
· The security or shares involved are “Specified Security” or “Sweet Equity Shares”.
(for this purpose specified securities means securities as defined under section 2(h) of Securities Contracts (Regulation) Act)
· Specified Securities or Sweet equity shares must be allotted to the employee on or after 1st April, 2009. If shares or securities are transferred during 1st April, 2007 to 31st March, 2009, then employer is liable to pay FBT under section 115 WB(1)(d) of Income Tax Act, 1961.
· Securities are allotted by the employer to the employee or former employee.(Directly or Indirectly)
· These securities or shares are transferred to the employee either free of cost or at a concessional rate.
If the above conditions are satisfied perquisite will be taxable in the hands of employee in the assessment year relevant to the previous year in which shares or securities are allotted or transferred to the employees.
Value of Perquisite will be the difference between the fair market value of shares on the date of exercise of option and the amount actually paid or recovered from the employee in respect of such shares.
Details to Stock Exchange
Certain details of the Company along with the details of ESOS are required to be given to the Stock Exchange.
Previous and after intimation of Board Meeting in which the matter is to be discussed is required to be given to Stock Exchange.
Copy of Scheme, notices of EGM/AGM for approving the scheme, certified copy of special resolution, list of promoters, copy of latest audited annual report, certificate of auditors, specimen copy of share certificate, undertaking all certificate by Company Secretary are required to be given to Stock Exchange.
The shares issued and allotted under ESOS should be listed immediately upon allotment in the recognized stock exchange where the securities of the company are listed.
The company has to file a statement with the Stock Exchange before the exercise of the option and should obtain in principle approval from such Stock Exchange. And as and when the ESOS are exercised, the company should notify the SE.
Procedure for Granting of Shares Under ESOS
1. Hold board meeting for
a. Approving the ESOS
b. Calling and Approving the notice of AGM/EGM for passing special resolution
c. Constituting the compensation committee
2. In case of listed company advance notice to the Stock Exchange and after the Board Meeting, outcome of the Board Meeting is also to be notified immediately.
3. Send three copies of notice to the Stock Exchange.
4. Make disclosures to the grantees.
5. Hold general meeting and pass required special resolution.
6. Intimation to SE along with the certified copy of special resolution.
7. The company shall appoint a registered merchant banker for the implementation of ESOS as per guidelines till the stage of framing the ESOS and obtaining in principal approval from the stock exchange.
8. File form 23 within 30 days of the special resolution to register the resolution with ROC.
9. Obtain in principal approval from SE.
10. Prepare a list of options exercised by employees.
11. Hold board meeting for allotment of shares.
12. File a return of allotment in form 2 to the ROC within 30 days.
13. Give intimation to NSDL/CDSL regarding corporate actions.
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