EMPLOYEE STOCK OPTION SCHEME

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 excluding 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:-

A disclosure regarding risk involve, brief of Company, Terms and Conditions of ESOS has to be made available to the prospective grantees.

Compensation Committee:-

A Compensation Committee of the Board of Directors, consisting majority of independent directors, has to be constituted for administration and superintendence of the ESOS. The Committee shall formulate the detailed terms and conditions of the ESOS.

Merchant Banker:-

The company shall appoint Merchant Banker for the implementation of 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.
A separate Special Resolution in the general meeting shall be 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 whom 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.

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.

Stock Exchange Compliance

• Step by Step intimation to the Stock Exchange.
• Certain details of the Company along with the details of ESOS are required to be given to the Stock Exchange.
• In principal approval to be obtained before allotment of shares to the employees.
• The shares issued and allotted under ESOS should be immediately listed.

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.

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.(Schedule IV)
5. Hold general meeting and pass required special resolution.
6. Intimation to Stock Exchange along with the certified copy of special resolution.
7. File form 23 within 30 days of the special resolution to register the resolution with ROC.
8. Hold Board Meeting for:-
a. Appointing a registered Merchant Banker for the implementation of ESOS.
b. Authorisation for obtaining in principal approval from the stock exchange.
c. Implementation of the scheme.
9. Disclosure to the Stock Exchange. (Schedule V)
10. Obtain in principal approval from Stock Exchange.
11. Prepare a list of options exercised by employees.
12. Hold board meeting for allotment of shares.
13. File a return of allotment in form 2 to the ROC within 30 days.
14. Giver prior intimation to the Stock Exchange about the Board Meeting and outcome of the Board Meeting is also to be notified immediately.
15. Give intimation to NSDL/CDSL regarding corporate actions.

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.
• Where the scheme provide for graded vesting-
o 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
o 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.
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:-

ESOP have now been included in the purview of perquisites under section 17(2) of the Income Tax Act, 1961. The value of the ESOP determined on the date of exercise, as the difference between the fair market value of the shares as on the date of exercise and the exercise price actually paid by the employee, would be taxable as a perquisite in the hands of the employees in the assessment year relevant to the previous year in which shares or securities are allotted or transferred to the employees.

Ex:- Exercise Price=20
Fair Market Value on the date of vesting of option = 50
Fair Market value on the date of exercise = 80
Taxable Value = 80-20=60

Any subsequent gain on sale of shares would be taxed as capital gains. The cost of acquisition for computing capital gains would be the Fair Market Value on the date of exercise of option. In case of a listed Company, long term capital gains tax would be nil but the holding period would start from the date on which the employee becomes the registered owner of the shares.