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Employee Stock Option Plan ppt
The document discusses Employee Stock Option Plans (ESOPs) and Employee Stock Purchase Plans (ESPs), outlining their definitions, eligibility criteria, and regulatory frameworks under Indian law. ESOPs grant employees options to acquire shares at a predetermined price, while ESPs allow immediate share acquisition through payroll deductions. It also addresses tax implications and SEBI guidelines regarding the issuance of shares under ESOPs.
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Employee Stock Option Plan ppt
- 1. EMPLOYEE STOCK OPTION PLAN “A win- win situation for both- Employer and Employee” BY Abhilasha Kumari College of Legal Studies, UPES B.B.A. LL.B. (Hons.)
- 2. What are ESOP’s •Section2(37) of the Companies Act, 2013 defines ESOP. •In ESOP the company grants an option to its employees to acquire shares at a future date at a pre-determined price. •These are not transferable-Clause 9 of SEBI (SHARE BASED EMPLOYEE BENEFITS) REGULATIONS, 2014 •The options cannot be pledged, hypothecated, mortgaged or otherwise alienated in any respect. Rule 12(8)(b) of Companies (Share Capital and Debentures) Rules, 2014)
- 3. ELIGIBILITY TO PARTICIPATEIN ESOS •An employee •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. (SEBI (Share Based Employee Benefit) Regulations, 2014)
- 4. Employee Stock Purchase Plan •ESPSis generally used in listed companies, wherein the employees are given the right to acquire shares of the company immediately, not at a future date as in ESOS. •Clause 2(h) of SEBI Guidelines, 2014 defines "employee stock purchase scheme (ESPS)“. •Employees contribute to the plan through payroll deductions, which build up between the offering date and the purchase date.
- 6. Routes under ESOP 1.Direct Issue of ESOP’s • Rule 12 read with section 62(1) (b); ( Refer Memo) 2. Creation of Trust •Rule 16 read with section 67. (Refer Memo) •Indian Trust Act, 1881. •Clause 3 of SEBI (SEBI (SHARE BASED EMPLOYEE BENEFITS) REGULATIONS, 2014 )
- 7. Framework governing ESOP 1.Companies Act, 2013 •Sec 2(37)- Definition of ESOP •Sec 62 (1)(b)- corporate restructuring by ESOP 2. Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, 3. Income Tax Act, 1961 •clause (iii) of sub-section (2) of section 17 •Section 49(2B) 4. Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014.
- 8. Highlights of Rule12 of the Companies (Share Capital and Debentures) Rules, 2014, •Approval from Shareholders via Special Resolution •Permanent Employees of Company, Holding Company, Subsidiary Company and Associate Company can be covered. •All Directors excluding promoter directors and Independent Directors can be covered under the ESOP plan. •Mandatory annual disclosures in Directors Report.
- 9. Contd. •Minimum period ofone year between grant and vesting of options •In case of death, all options granted shall vest in the legal heirs. -Rule 12(8) (d) . •In case of resignation, all unvested options shall lapse.- Rule 12(8) (f). •Register to be maintained as per format prescribed by ROC.
- 10. Tax treatment •When theemployee sells the shares subsequently, the gains will be taxed as capital gains. (see note below). •The capital gains tax implications would depend upon the period of holding of shares from the allotment date and whether security transaction tax (STT) has been paid. •The section 54EC of the Income-tax Act, 1961 allows a deduction in respect of LTCG arising from sell/transfer of any long term capital asset . (see note)
- 11. Contd. •ESOP benefits forma part of the employee’s salary income and are taxable as a perquisite. (see note below). – CBDT circular No 710. •However, For A.Y.2001-02 and subsequent year(s), the Law stands modified and such benefit(s) are not to be taxed as perquisites. Mere grant of stock options or even exercise of such stock options whereby shares are in fact allotted does not attract tax as perquisite(s). They are to be taxed only once when sold, as capital gains.
- 12. SEBI Guidelines •Promoters andthe part- time directors will not be entitled to receive the securities under the ESOPs even if the promoter(s) is/are employee(s) of the company. •The issue of shares/convertible instruments under an ESOP shall not exceed 5% of the paid-up capital of the company in any one year. •Clause 4 of the guidelines on preferential issues providing for pricing shall be also applicable to the ESOPs. •A company introducing ESOPs shall submit a certificate to the concerned stock exchange at the time of the listing of the securities. •If the exercise-price is at a discount to the market price, the discount will be treated as a cost. •A minimum lock-in period of 1 year from the date of
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Editor's Notes
- #3 Section 2(37) of the Companies Act, 2013 defines employees’ stock option means (ESOP) as- “The option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price.”
- #5 Clause 2(h) of SEBI Guidelines, 2014 defines "employee stock purchase scheme (ESPS)"means a scheme under which a company offers shares to employees, as part of public issue or otherwise, or through a trust where the trust may undertake secondary acquisition for the purposes of the scheme;
- #7 3. (1) A company may implement schemes either directly or by setting up an irrevocable trust(s): Provided that if the scheme is to be implemented through a trust the same has to be decided upfront at the time of taking approval of the shareholders for setting up the schemes: Provided further that if the scheme involves secondary acquisition or gift or both, then it is mandatory for the company to implement such scheme(s) through a trust(s).
- #8 Section 17(2)(iii): Perquisite now includes, the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at a concessional rate, to an individual who is or has been in the employment of that person. Provided that in a case where allotment or transfer of specified securities is made in pursuance of an option exercised by an individual, the value of the specified securities shall be taxable in the previous year in which such option is exercised by such individual. Section 49(2B): Where the capital gain arises from the transfer of the specified security referred to in sub-clause (iiia) of clause (2) of section 17, the cost of acquisition of such specified security shall be the FMV as on the date of exercise of the option.
- #11 . The capital gains will have to be computed as the difference between the sale proceeds and FMV of the shares that was considered by the employer while computing the perquisite value including any expenditure incurred wholly in connection with the sale. The deduction u/s 54EC will be available subject to the following conditions: -The asset transferred should be a long term capital asset and hence there should be a long term capital gain. -Such capital asset should have been transferred after 1-04-2000 by the assessee. -The assessee has within a period of 6 months after the date of such transfer has invested the capital gain in the long term specified asset. -Specified assets are the bonds redeemable after 3 years issued by National Bank for Agriculture and Rural Development (NABARD) or by the National Highways Authority of India (NHAI) or the bonds issued by Rural Electrification corporation Ltd. With effect from A.Y 2002-03 National Housing bank and SIDBI have been also included who can issue such bonds u/s 54EC. -The cost of long term specified assets which is considered for the purpose of exemption u/s 54EC, shall not be eligible for deduction with refernce to such cost u/s 80C. It means investment made in bonds u/s 54EC is not eligible for deduction u/s 80C
- #12 The perquisite value is computed as the excess of the fair-market value (FMV) of the share on the date of exercise over the exercise price. There are specific valuation rules prescribed for listed and unlisted companies to determine the FMV. The employer is required to withhold tax at source in respect of such a perquisite.