Employee stock option plan

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  • 1. Employee Stock Option Plans Lakshminarayanan Alaguraja Advocate
  • 2. Employee Stock Option Plan (ESOP)
    • a plan through which a company awards Stock Options to the employees based on their performance. Under an ESOP, the employees have right to buy the shares of the company on a predetermined date at a predetermined price. The objective of ESOP is to motivate the employees to perform better and improve shareholders' value. Apart from giving financial gains to the employees, ESOP also creates a sense of belonging and ownership amongst the employees.
  • 3. Securities and Exchange Board of India
    • The Securities and Exchange Board of India (Employee stock option Plan and Employee Share Purchase Plan) guidelines, 1999 have been issued to guide the listed entities for the purpose of accounting for employee stock options. The unlisted entities, on the other hand, have an option to follow the SEBI guidelines or the guidance note on ‘Employee Share Based payments’ issued by the Institute of Chartered Accountants of India.
  • 4. Applicability
    • Covers companies as defined in S.2(17) which is:
        • Listed in a recognized stock exchange in India – Recognized by SEBI
        • Listed in a recognized stock exchange outside India – Recognized by similar regulatory authority.
      • Subsidiary or holding company of a company referred above.
  • 5. Persons covered
      • Permanent employee of the company. (include parent / subsidiary)
      • Whole-time directors.
      • Non-whole time directors [Whether relevant for guideline under Section 17(2)(iii)]
  • 6. Persons not to be covered
      • Employee who is a promoter or belongs to the promoter group.
      • A director (directly or indirectly) holds more than 10% of the outstanding equity shares of the company.
  • 7. Shareholder Approval
    • The ESOP shall be approved by the shareholders by a special resolution.
    • Specific shareholder approval shall be obtained employees of subsidiary /holding company
  • 8. Pricing
    • The companies will have the freedom to fix the exercise price at any level provided they confirm to the accounting policies of SEBI.
  • 9. Accounting Policies
    • In the case of every company that has passed a resolution for an Employee Stock Option scheme, the Board of Directors shall at each annual general meeting place before the members 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 general meeting.
  • 10. Central Government Guidelines
    • Filing requirements:
      • Mere filing. No approval required.
      • Even a scheme or plan of a foreign company must be filed, if the employees rendering services in India are entitled to participate.
      • English translation to be enclosed.
  • 11. Amendment
    • Amendment
      • No amendment of conditions contained in the written document after the date the scheme or plan came into effect.
    • Kind of amendments that are allowed.
      • Amendments through a High Court, where the amendments are not prejudicial to the interest of the employees.
  • 12. SEBI Guidelines
    • Compliance Requirements:
      • Plan or Scheme to comply with regulations prescribed by SEBI.
      • Any other regulatory authority, with regard to such plan or scheme.
      • No to contravene any other law for the time being in force, that is material for giving effect to such plan or scheme.
    • Compliance conditions apply only to an Indian company.
  • 13. Compensation Committee of the Board
    • The Scheme would be administered under the superintendence and direction of a Compensation Committee of the Board of Directors. The Compensation Committee shall consist of a majority of independent directors.
  • 14. Taxation issues
    • The taxability depends on the nature of gain at the time of sale.
    • If you have a short-term capital gain, you have to pay tax at the rate of 10% (plus surcharge if applicable).
    • Long-term gains are exempt from tax.
  • 15. ESOP LIFE CYCLE GRANT VEST EXERCISE SALE Employee receives the right Employee earns the Right Employee exercises the Right Employee sells the shares
  • 16. Thank You