Frequently
Asked Questions (FAQs) on Employee Stock Options
Scheme
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1. What is the
ESOS ?
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A compensation package for the key employees
of a company should be designed to attract, motivate, and
retain the people who can help the business succeed. Deferred
compensation can be used as a technique of encouraging the top
employees to remain with the company by combining a delayed
vesting arrangement with a deferred compensation plan. An
organization committed to being a high-performing
organization, aims at encouraging every individual to raise
his/her level of performance so as to ensure that the
individual efforts combine to maximize both corporate
performance and shareholder value. Universally, these
objectives are aimed to be achieved through the use of a very
potent instrument, namely the Equity Stock Option Scheme
(ESOS).
Employees' stock options are one of the most exciting and
innovative ways, developed in the post-liberalization period,
by which a company can design a compensation package that helps
it to achieve these goals at the lowest possible cost.
Establishing a successful share scheme and tailoring it to a
particular company's needs is a challenge. Under a well-designed
scheme, there can be major benefits for both the company and its
employees.
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2. What is the purpose of the ESOS ?
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The purpose of Employee Stock Options Scheme (ESOS)
is to advance the interests of the company and its
shareholders by offering to those employees of the
company who will be responsible for the long-term growth of
the company’s earnings the opportunity to acquire or increase
their equity interests in the company, thereby achieving a
greater commonality of interest between shareholders and
employees, enhancing the Company’s ability to retain and
attract highly qualified employees and providing an additional
incentive to such employees to achieve the Company’s long-term
business plans and objectives.
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3. What are the
benefits of ESOS ? |
The benefits of ESOS/ESPS to employees are that they are
given a chance to become the shareholders of the company at
a discounted price to the market price. Thus the employees are
given a chance to share the profits of the company by making
them shareholders.
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4. How will the scheme be exercised ?
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The company will constitute a Compensation Committee for administration and
superintendence of the ESOS. It will be a Committee of the Board of Directors
consisting of a majority of independent directors. The Committee shall
formulate the terms and conditions of the ESOS like
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- The quantum of option to be granted per
employee and in aggregate.
- The conditions under which the option
vested in employee may lapse
- In case of termination of employment for
misconduct
- The time period within which the option is
to be exercised in case of termination or resignation of an
employee
- The right of an employee to exercise the
options
- The procedure for making a fair and
reasonable adjustment to number of options and to the
exercise in case of rights issues bonus issues and other
actions
- The grant, vest and exercise of options in
case of employees who are on long leave
- The procedure for cashless exercise of
options
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No Scheme will be offered unless
the shareholders of the company approve it by passing a
special resolution in the general meeting.
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| 5. Requirement of Separate resolution
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It will be required in case of
- Grant of option to employees of subsidiary
or holding company and,
- 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 company at the time of grant of option.
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| 6. Can there be any variation in
terms of ESOS ? |
- The company shall not vary the terms of
ESOS in any manner that may be detrimental to he interests
of the employees.
- The company may by special resolution in a
general meeting vary the terms of ESOS offered pursuant to
an earlier resolution of a general body but not yet
exercised by the employee provided such variation is not
prejudicial to the interests of the option holders. These
shall apply to such variations of terms as they do to the
original grant of option.
- The notice for passing special resolution
for variation of terms of ESOS shall disclose full details
of the variation, the rationale therefore, and the details
of the employees who are beneficiary of such variation.
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| 7. What will be
the effect of the scheme on the rights of the employee ?
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The employee shall not have right to receive
any dividend or to vote or in any manner enjoy the benefits of
a shareholder in respect of option granted to him, till shares
are issued on exercise of option.
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| 8. Other Legal Aspects
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The Board of Directors shall at each annual
general meeting before the shareholders a certificate from the
auditors of the company that the scheme has been implemented
in accordance with the SEBI guidelines and in accordance with
the resolution of the company in the general
meeting.
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| 9. Will there be any lock-in-period
for the transfer of shares ? |
There shall be a minimum period of one year
between the grant of options and vesting of option. The
company shall have the freedom to specify the lock – in period
for the shares issued pursuant to exercise of
option.
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| 10. Who is eligible
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It will be applicable to all class of
employees whether working in India or abroad at the discretion
of the Compensation Committee. However the following classes
of employees are not eligible
- A employee who is a promoter or belongs to
the promoter group
- 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.
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| 11. Employee Stock Options through
Trusts ? |
Employee Stock Options are also implemented
through creation of Trusts. Trusts are formed under the Indian
Trust Act and registered under the relevant Trust Act of the
state in which the Trust's activities are to be based. The
objectives of the Trust are to administer the Scheme for the
employees of a certain organization. The Company issues a
certain number of shares at par to the Trust. The Trust then
issues these shares to the Company employees in accordance
with pre-set guidelines. Under such an arrangement, the
employees receive shares from the Trust. The Trust can also
buy back the shares from employees in circumstances, which may
be specified in the Trust Deed. This arrangement imparts
liquidity in the scheme and is suited to companies whose
shares are not listed.
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| 12. What will be the Tax –
Implications of the scheme ? |
The employees are liable for Capital Gains
tax at the time of sale of the shares. The taxable amount
being Full value of Consideration as reduced by the Indexed
Cost of Acquisition. The cost of acquisition being the amount
paid for purchase of shares.
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| 13. Effect in case of certain
situations ? |
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In case of Death of Employee while in
employment - all the options granted to him till such date
shall vest in the legal heirs or nominees of the deceased
employee.
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In case the employee suffers a permanent
incapacity while in employment -all the options granted to him
as on the date of permanent incapacitation shall vest in him
on that day.
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In the event of resignation or termination
of the employee - all options not vested as on that day shall
expire. However, the employee shall, be entitled to retain all
the vested options. Option once granted to any employee shall
not transferable to any person and also it cannot be pledged,
hypothecated, mortgaged or otherwise alienated in any other
manner
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| 14. Options outstanding at Public
issue ? |
The provisions of the Securities and
Exchange Board of India (Disclosure and Investor Protection)
Guidelines prohibiting initial public offering by companies
having outstanding warrants and financial instruments shall
not be applicable in case of outstanding option granted to
employees in pursuance of ESOS.
If any option is outstanding at the time
of an initial public offering by a company, the promoters'
contribution shall be calculated with reference to the
enlarged capital that would arise on exercise of all vested
options.
If any options granted to employees in
pursuance of ESOS are outstanding at the time of initial
public offering, the offer document of the company shall
disclose all the information required in the Director's
Report. |
| 15. Accounting Policies
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- The options granted to the employee will be
treated as employee compensation in the financial statements
of the company
- The accounting value of options shall be
equal to the aggregate, over all employee stock options
granted during the accounting period, of the fair value of
the option.
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For this purpose:
Fair value means the option discount, or,
if the company so chooses, the value of the option using the
Black Scholes formula or other similar valuation
method.
Option discount means the excess of the
market price of the share at the date of grant of the option
under ESOS over the exercise price of the option (including
up-front payment, if any)
Where the accounting value is accounted for as employee compensation the amount
shall be amortised on a straight-line basis over the vesting
period.
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 expense 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.
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