• Invest in India
  • Corporate Legal Services

Employee Stock Option Plan under Companies Act, 2013 for Unlisted Companies

June 15, 2016     by Kamini Goyal

It is an option to buy the shares of the Company at a future date and at a pre-determined price.

These plans are aimed at: –

  • Improving the performance of the company;
  • Increasing the value of the shares by involving stock holders, who are also the employees, in the working of the Company;
  • ESOPs help in minimizing problems related to incentives. 

Eligibility for ESOP (Section 2(37)): – 

Applicable Provisions: –

Section 62 (1)(b) and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014
Approval of shareholders: – Private Companies: To offer ESOP, approval of shareholders by way of ORDINARY RESOLUTION* is required. (*Notification dated 5th June, 2015).
Other than the Private Companies:Approval of shareholders by way of SPECIAL RESOLUTION is required. 
  lifecycle                                             
 Important provisions: –
what-if-option

If employee dies, suffers disability or resigns (Rule 12(8)) Disclosures:

Disclosures in the Explanatory Statement (Rule 12(2)): 

  • Total number of stock options to be granted;
  • Identification/ Appraisal process for determining the eligibility of employees;
  • Requirements of vesting and vesting period and the maximum period within which the option shall be vested;
  • Exercise Price/Pricing Formula/Exercise Period/Method of valuation;
  • Lock in period, if any;
  • Maximum no. of ESOPs to be granted per employee and in aggregate;

Method of valuation and a statement that the Company shall comply with the applicable AS.

Disclosure in Board’s Report (Rule 12(9)): 

  • Options granted/vested/exercised/lapsed.
  • Total number of shares arising as a result of exercise of options;
  • Exercise Price;
  • Variation of terms of options;
  • Money realized by exercise of options;
  • Total no. of options in force
  • Employee wise details of options granted to:

KMPs;Any employee who receives 5% or more of options granted during that year;Employees who were granted options of more than 1% of total issued capital during any one year.  
Register to be maintained in Form SH-6 (Rule 12(10)): 

  • Company shall maintain a register of Employee Stock Options in Form SH-6
  • Register shall be maintained at the Registered Office or such other place as the Board may decide.
  • Entries shall be authorized by CS or the person authorized by Board.

Listed CompaniesWhere the equity Shares of the Company are listed, the ESOP shall be issued as per the SEBI Regulations.  
Accounting & Valuation of ESOP 

  • Accounting should be done in accordance with “Guidance note on accounting for employee share-based payment” (issued 2005).
  • Valuation: –

At the time of grant of option  fair value of shares shall be done by registered valuerAt the time of exercise of option valuation shall be done Merchant banker.

  • Valuation of ESOP in case of Unlisted Companies:-

Fair value of shares at the time of “grant of Option” and “exercise of option” shall be done by registered valuer as per “Guidance note on accounting for employee share-based payment” (issued 2005).
Income Tax Act, 1961 does not specify any method for computation of FMV of shares but Section 17 and Rule3(8) of the Act  provides that for the purpose of perquisite valuation the FMV of ESOP shall be such value as determined by a merchant banker on the specified date.
Specified Date” means.-the date of exercising of the option; orany date earlier than the date of the exercising of the option, not being a date which is more than 180 days earlier than the date of the exercising.

tax

  • COMPANY

The Issuing Company can claim ESOP cost as deduction.
Income Tax Appellate Tribunal in an order by (Dy. Commissioner of Income-tax (LTU), Bangalore Vs M/s. Biocon Limited) held that “discounts under the ESOP are an employee cost and should be allowed as a deduction over the vesting period, in the hands of the issuing company.”In an ESOP, the shares are issued to the employees at a future date (after vesting period) at price lower than fair market value (FMV) of the share.
Hence ESOP discount, is nothing but the reward for services, is a taxable perquisite to the employee at the time of exercise of option, and its valuation is to be done by considering the fair market value of the shares on the date on which the option is exercised.

ELIGIBLE

NON-ELIGIBLE

 

Applicable provision Concerned Person Applicable provision Concerned Person
Section 2(34) Director Section 149(9) Independent Directors
Section 2(59) Officers Section 2(69) Promoter
Not defined under Companies Act, 2013 Employees Director who either 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.
Directors, officers or employees of the holding or the subsidiary company.
Applicable Provision, if any Particulars Explanation
Grant Means the issue of options to Eligible Employees (explained above).
Vest Means the process by which the right to apply for Shares accrues to Eligible Employees against the Options Granted to them.
Exercise Means making of an application by an employee to the Company for issue of shares against vested options.
Rule 12 (3) Freedom to determine Exercise Price Companies granting options to employees can freely determine exercise price in conformity with the applicable accounting policies, if any.
Rule 12(4) Separate Resolution Required in two cases: -i.        For granting options to employees of holding or subsidiary company; or

ii.      For grant of option to identified employees, during one yearequal to or exceeding 1% of the issued capital at the time of grant of options.

 

Rule 12(5)(a), (b) Variation of the terms of the scheme ·         Special Resolution required

·         Variation should not be prejudicial to the interests of the option holders

 

·         Notice for passing SR shall disclose the particulars of variation and rationale thereof.

 

Rule 12(6)(b) Lock in Period The Company has the freedom to specify the lock in period for issued shares.
Rule 12(6)(c) Dividend/Voting Rights The Employees will not enjoy the rights similar to members till the time shares are issued on exercise of option.
The options granted shall ü  Not be transferableü  Not be pledged, hypothecated, mortgaged or otherwise encumbered

ü  Be exercised only by the employee to whom the option is granted.

Death of employee If employee dies while in employment, all the options granted to him till date shall vest in the legal heirs or nominees of deceased employee.
Permanent Incapacity If employee suffers permanent incapacity while in employment, all the options granted to him as on date shall vest in him on that day.
Resignation or termination of employment All options not vested shall expire.

Employee can exercise the vested option subject to the terms of the scheme.

25 thoughts on “Employee Stock Option Plan under Companies Act, 2013 for Unlisted Companies

  1. Dear sir
    In case if Foreign holding company issued ESOP to the employees of unlisted subsidiary company. who will do the accounting of ESOP
    holding or subsidiary

    1. As per Rule 12(1)(c) of (Share Capital and Debentures) Rules, 2014, ESOP can be issued to an employee of a subsidiary company in India. In such a case, holding company will do the accounting of ESOP and holding company being a foreign company, it needs to follow the rules directed by its governing body.

    1. As per Sec. 62(1)(b) of Companies Act 2013, Private Co. going for ESOP scheme will need to file e-form PAS-3 (Return of Allotment), and it is filed as and when options are exercised by the employees and shares allotted to them by the Board of Directors.

  2. In case there is a requirement to increase authorised capital of the Company, when shall it be increased? at the time of grant of option or on exercise of the option or on vesting itself?

  3. Whether a private company can issue further Esop’s to an M.D ALREADY HAVING 8.23% EQUITY SHARES AND 3% srtock options which is exceeding the limit of 10% outstanding equity shares to be ineligible?

    1. As per Rule 12(4) of the Companies (Share Capital and Debentures) Rules, 2014, special resolution is required to be passed for grant of option to identified employees, during any one year, equal to or exceeding one percent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of option.

  4. Should a private company open a separate bank account for accepting share application money during exercise of esop’s untill allotment

    1. Issuance of ESOP is regulated by section 62(1)(b) of companies Act,2013 there is no such requirement given under this section for opening separate bank account Hence money received under ESOP can be kept in the normal bank account of the Company.

  5. Does this guidelines also applicable to Equity Settled stock appreciation scheme of an unlisted company? Since company law is silent on the SAR.

    1. As per SEBI (Share Based Employee Benefits) Regulations, 2014, the guidelines of SEBI shall not be followed in case of Equity Settled stock appreciation scheme of unlisted Company. These regulations are meant for listed company only.

  6. Are SEBI (SBEB) Regulations applicable to a subsidiary of listed company issuing ESOPs? If not, are there any other SEBI regulations concerning the same.

  7. Hi,
    My employer offered me 25,000 as a bonus linked to ESOP. But it is written only in the appraisal document. No other details given like vesting period, how many shares etc., I havn’t got any documents regarding that, how can I claim that?

    1. There is a proper procedure to issue ESOP shares, as in your case it seems that
      • no procedure has been followed for the ESOP
      • no shares are disclosed
      • simply offer of an amount as bonus linked to ESOP can’t be considered as ESOP
      • company have to provide grant of option, vesting of option and exercise of option period.

  8. What are the compliance’s a private limited company needs to do in case of grant of ESOP options. However, these grants are exercisable at the time of liquidation of the company. Please help.

    1. As per section 62 read along with rule 12 sub rule 6(a) of Companies (share capital and Debentures) Rules 2014 there shall be minimum gap of one year between the grant of options and vesting of options. Once shares are granted they can be exercise by ESOP holders once vested, at any point of time as mention in the scheme.As per our understanding, there is no prohibition to exercise the option if company is in liquidation.After Liquidation life of company comes to end.

  9. Dear Sir,

    Can we issue share under ESOPS at face value.
    Please let me know.As Company act says Company has discretion to determine price.

        1. Section 53 of the Companies Act, 2013 says that except as per Section 54 of the Act, the company shall not issue shares at a discount to face value and Section 54 talks about sweat equity shares only.

          1. In our case, our’s is a private limited company. ESOP scheme implemented (Incl. nomination forms)..options granted and vested. thereafter Employee died. At the time of allottment of shares against options exercised…does the company required to obtain valuation report..? Can it obtain valuation report from Statutory Auditor or any other Independent Auditor.?

            Or

            Is it compulsorily to obtain valuation from merchant banker, for Pvt ltd company…will you please quote relevant provisions thereof…?

          2. Procedure for allotment shares to nominee
            As per the provisions of the section 62(1)(b) of the Companies Act, 2013 read with Rule 12 of the Companies (Share Capital and Debenture) Rules, 2014, In the event of the 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.

            Valuation report is mandatory in case of ESOP. Valuation shall be done (Fair value of shares) at the time of “grant of Option” and “exercise of option” by registered valuer as per “Guidance note on accounting for employee share-based payment” (issued 2005) and pursuant to the Rule 40D of Income Tax Rules ,1962 which provides that FMV of ESOP shall be as determined by a merchant banker on the specified date.

            Specified Date” means.-the date of exercising of the option; or any date earlier than the date of the exercising of the option, not being a date which is more than 180 days earlier than the date of the exercising.

Leave a Reply

Your email address will not be published. Required fields are marked *


Please Fill All Field