Regulatory Provisions for ESOPs -CA Jalaj Sinha
Synopsis Provisions of Companies Act,1956 SEBI ESOP Guidelines,1999 Provisions in FEMA Provisions relating to Sweat Equity Shares
Provisions of Companies Act,1956 S.81 of the Act provides for procedure for further issue of capital by a company which applies to the issue of ESOPs by a Company to its employees. S.81 (1)(a) : provides for passing of Special Resolution(resolution by three-fourth majority) in a duly convened General Meeting of the Company for approval of shareholders for issue of equity shares of the Company to the employees, under the scheme detailing terms of the issue. The above provision is applicable to Listed Companies and Public Unlisted Companies. The above provision is not applicable to Private Companies.
SEBI ESOP Guidelines, 1999 These Guidelines apply to a Company whose shares are listed on any recognized stock exchange in India. These Guidelines are not applicable to unlisted public companies. These Guidelines are not applicable to private companies.
SEBI ESOP Guidelines, 1999 Commencement and amendments The SEBI ESOP Guidelines came into effect from 19 th June,1999. The Guidelines were amended vide various circulars in the year 2003,2004 and 2009. Objectives of the Guidelines The Guidelines provide for various compliances by listed Companies for issue of ESOPs with the objective of protecting the interests of the existing shareholders and ensuring transparency in the process.
Provisions and Compliances in ESOP Guidelines ESOPs can be granted only to permanent employees working in India or out of India of company, holding company and subsidiary. Directors holding more than 10% directly or indirectly are not eligible for ESOPs. An employee who is a promoter or belongs to the promoter group is also not eligible for ESOPs. The Company shall obtain shareholders approval for the Scheme, by passing a special resolution in the general meeting. The guidelines mandate formation of a Compensation Committee. The Committee shall comprise of a majority of Independent Directors. The Committee shall formulate the detailed terms and conditions for the Scheme relating to quantum of options, pricing, vesting, exercise of options etc. The Committee shall also frame suitable policies and systems in order to ensure that there is no violation of any other SEBI guidelines and regulations.
Provisions and Compliances in ESOP Guidelines The guidelines provide that ESOPs cannot be offered to employees of a company unless the shareholders of the company approve ESOSPs by passing a special resolution in the general meeting. The explanatory statement to the notice and the resolution proposed to be passed in general meeting for ESOS shall contain the following information: 1.thetotalnumberofoptionstobegranted; 2. identification of classes of employees entitled to participate in the ESOPs; 3. requirements of vesting and period of vesting; 4. maximum period within which the options shall be vested; 5. exercise price or pricing formula; 6. exercise period and process of exercise;
Provisions and Compliances in ESOP Guidelines 7.the appraisal process for determining the eligibility of employees to the ESOS; 8.maximumnumberofoptionstobeissuedperemployeeandinaggregate; 9.a statement to the effect that the company shall conform to the accounting policies specified in the guidelines; 10.the method which the company shall use to value its options whether fair value or intrinsic value; Approval of shareholders by way of separate resolution in the general meeting shallbeobtainedbythecompanyincaseof; 1. grant of option to employees of subsidiary or holding company and, 2. 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 companyatthetimeofgrantofoption.
Provisions and Compliances in ESOP Guidelines The guidelines also provide that the company shall not vary the terms of the ESOSPs in any manner, which may be detrimental to the interests of the employees. The company may, however, vary the terms of the ESOPs by passing a special resolution in the General Meeting. The notice for passing special resolution for variation of terms of ESOS shall disclose full details of the variation, the rationale there for, and the details of the employees who are beneficiary of such variation. The company granting ESOPs is free to determine the pricing, subject to accounting guidelines. Thevestingperiodshallnotbelessthanoneyear. Option granted to employee shall not be transferable to any person.
Provisions and Compliances in ESOP Guidelines Option granted shall not be pledged, hypothecated, mortgaged or otherwise alienated in any other manner. ThedetailsoftheESOPsshallbedisclosedintheDirectors Report. The Board of Directors shall, at each AGM, place before the shareholders, the certificate from auditors stating that ESOP Scheme is as per SEBI guidelines and in accordance with the resolution passed in the General Meeting.
Provisions and Compliances in ESOP Guidelines TheScheduleVtotheGuidelinesrequiresalistedcompanyto file various disclosures, documents and undertakings with the stock exchange duly signed by the compliance officer of the company as follows: authorized and issued share capital of the company validityofthescheme date of the general meeting approving the scheme Classes of employees Kind of securities granted as options exercise price, pricing formula, lock-in period, vesting and exercise period provisions for corporate actions appraisal process and policies provisions relating to separation of employees forfeiture or lapse of options Incaseofvariationsinthescheme,thedetailsofsuchvariation
Provisions and Compliances in ESOP Guidelines Copy of Stock Option Scheme/Amended Stock Option Scheme, certified by company secretary. Copy of Notice of general meeting for approving the Scheme/for amending the Scheme/for approving grants under the scheme. Copy of resolution of shareholders for approving the Scheme/ for amending the Scheme/for approving grants under the scheme. ListofPromotersasdefinedundertheSEBI(ESOS&ESPS)Guidelines. Copy of latest Annual Report. Certificate of Auditor on compliance with SEBI (ESOS and ESPS) Guidelines. Specimen copy of Share certificate. Any other relevant documents.
Provisions of FEMA applicable to ESOPs Regulation Foreign Exchange Management ( Transfer or Issue of Security by a person resident outside India ) Regualtions,2000 Master Circular (1/2005-06,dated 1-7-2005) Direct Investment by residents in Joint Venture/ Wholly Owned Subsidiary abroad Master Circular (3/2005-06, dated 1-7-2005) Miscellaneous remittances from India
Provisions of FEMA applicable to ESOPs Transfer or Issue of Securities Regulations,2000. S.8 of the regulations provides for issue of ESOPs to persons resident outside India. An Indian company may issue ESOPs to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India, directly or through a trust. The scheme shall be compliant with SEBI guidelines and regulations. The face value of the shares granted under the scheme to non- resident employees shall not exceed 5% of the paid-up capital of the issuing company. The company shall furnish to RBI, within 30 days of the date of issue, a report disclosing the names of persons to whom shares are issued and the number of shares issued to them. TheCompanyshallalsofurnishtoRBI,acertificatefromCompanySecretaryofthe Company, that the value of the shares granted under the scheme does not exceed 5% of the paid-up capital of the company and that the SEBI regulations have been complied with.
Provisions of FEMA applicable to ESOPs Master Circular on Direct Investment by residents in Joint Venture/ Wholly Owned Subsidiary abroad: Sec.C.1 provides permission for purchase or acquisition of foreign securities. General permission has been granted to a person resident in India to acquire shares under cashless ESOP scheme issued by a company outside India, provided it does not involve any remittances from India. Permission has also been granted to purchase equity shares offered by a foreign companyunderitsesopschemesif thepersonisanemployeeordirectorof: 1. Indianofficeorbranchofaforeigncompany, 2. asubsidiaryinindiaof aforeigncompany, 3. an Indian company in which foreign equity holding, either direct or through a holdingcompany/specialpurposevehicles(spv),isnotlessthan51% authorized dealers are permitted to allow remittances for purchase of shares by eligible persons.
Provisions of FEMA applicable to ESOPs Master Circular on Miscellaneous remittances from India Sec.A.17 provides for acquisition of foreign securities under ESOP: Resident individuals who are employees or directors of an Indian office or branch of a foreign company having foreign holding of not less than 51% are permitted to acquire foreign securities under ESOP scheme without any monetary limit. They are also permitted to freely sell the shares provided that the proceeds of the sale are repatriated to India.
Sweat Equity Shares Regulatory provisions for issue of Sweat Equity Shares: S.79 A of Companies Act,1956 SEBI ESOP & ESPS Guidelines,1999 Unlisted Companies (Issue of Sweat Equity Shares) Rules,2003
Sweat Equity Shares S.79 A of the Companies Act,1956 provides for issue of Sweat Equity Shares: a company may issue SweatEquity Shares of a class of shares already issued by an approval of shareholders by special resolution passed in the General Meeting of the company. the resolution shall specify the number of shares, current market price, consideration, if any, and the class of employees or directors to whom such equity sharesaretobeissued. at the date of issue of such equity shares, the company should have completed at least one year from the commencement of business.
Sweat Equity Shares Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003: Sweat Equity shares may be issued to a permanent employee of the company workingin India oroutofindiaoradirectorofthecompany,employedasawhole time director or executive director of a company. the explanatory statement to the special resolution passed pursuant to provisions of S.79A of the Companies Act, shall specify the following: 1.the date of the meeting at which the proposal for issue of sweat equity shares wasapprovedbytheboardofdirectorsofthecompany; 2. the justification for the issue; 3. the number of shares, consideration for such shares and the class or classes of personstowhomsuchequitysharesaretobeissued; 4. the value of the sweat equity shares along with valuation report/ basis of valuationandthepriceatthewhichthesweatequityshareswillbeissued;
Sweat Equity Shares 5. the names of persons to whom the equity will be issued and the person's relationship with the company; 6. ceiling on managerial remuneration, if any, which will be affected by issuance of such equity; 7. a statement to the effect that the company shall conform to the accounting policies specified by the Central Government; and 8. diluted earning per share pursuant to the issue of securities to be calculated in accordance with the Accounting Standards specified by the Institute of Chartered Accountants of India. Approval of shareholders by separate resolution in the general meeting shall be obtained by the company for grant of shares to identified employees and promoters,duringanyoneyear,equaltoorexceeding1%oftheissuedcapital ofthecompanyatthetimeofgrantofthesweatequityshares.
Sweat Equity Shares the company shall maintain a Register of Sweat Equity Shares issued as per form prescribed in the rules. the company shall not issue sweat equity shares for more than 15% of total paid up equity share capital in a year or shares of the value of 5 crores of rupees, whichever is higher except with the prior approval of the Central Government. the Board of Directors shall make a disclosure of the details of the issue in the Directors Report. the price of sweat equity shares to be issued to employees and directors shall be at a fair price calculated by an independent valuer. In case the shares are issued for a consideration other than cash, the valuation shall be done by an independent valuer and approved by the shareholders of the company in General Meeting.
Sweat Equity Shares Sweat equity shares issued to employees or directors shall be locked in for a period of three years from the date of allotment. the Board of Directors shall at each annual general meeting place before the shareholders a certificate from the auditors of the company/ practicing company secretary that sweat equity shares have been allotted in accordance with the resolution of the company in the general meeting and the Rules.
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