Rule 12 of Companies (Share Capital and Debentures) Rules, 2014

ISSUE OF EMPLOYEE STOCK OPTIONS

What is Employee Stock Options?

As per Section 2(37) of Companies Act, 2013, “employee stock option” means 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.

Who is an Employee?

(a) a permanent employee of the company who has been working in India or outside India; or

(b) a director of the company, whether a whole time director or not but excluding an independent director; or

(c) an employee of a subsidiary, in India or outside India, or of a holding company of the company, excluding;

      I.        an employee who is a promoter or a person belonging to the promoter group; or

    II.        a director, directly or indirectly, holding more than 10% of the outstanding equity shares of the company either himself or through his relative or through any body corporate.

Applicability: A company, other than a listed company, which is not required to comply with SEBI Employee Stock Option Scheme Guidelines shall not offer shares to its employees under a scheme of employee stock option, unless it complies with the following requirements, namely:-

1. The issue of ESOS has been approved through a special resolution by shareholders;

2. The notice of the meeting shall state the following disclosures in explanatory statement - 

a.    total number of stock options to be granted;

b.    identification of classes of employees entitled to participate in the ESOS;

c.    the appraisal process for determining the eligibility of employees to the ESOS;

d.    requirements of vesting and period of vesting;

e.    maximum period within which the options shall be vested;

f.     the exercise price or the formula for arriving at the same;

g.    the exercise period and process of exercise;

h.    the lock-in period, if any;

i.      the maximum number of options to be granted per employee and in aggregate;

j.      the method which the company shall use to value its options;

k.    the conditions under which option vested in employees may lapse e.g. in case of termination of employment for misconduct;

l.      the specified time period within which the employee shall exercise the vested options in the event of a proposed termination of employment or resignation of employee; and

m.   a statement to the effect that the company shall comply with the applicable accounting standards.

3. The company granting the option of ESOS to its employees shall have the liberty to determine the exercise price as per the accounting policies;

4. The shareholders approval by separate resolution shall be obtained in case of-

v  grant of option to employees of subsidiary or holding company; or

v  grant of option to identified employees holding shares equal to or exceeding 1% of the issued capital of the company (excluding outstanding warrants and conversions), during any one year, at the time of grant of option.

5. The company may also vary the terms of ESOS not yet exercised by the company, by passing special resolution, where such variation is not prejudicial to the interest of the option shareholders;

6. The notice for passing such resolution for variation shall contain full details with regard to any variation including the details of beneficiaries of such variation;

7. There shall be a minimum gap of 1 year between grant of option and vesting of option;

“Provided that, in a case where options are granted by a company under its Employees Stock Option Scheme in lieu of options held by the same person under an Employees Stock Option Scheme in another company, which has merged or amalgamated with the first mentioned company, the period during which the options granted by the merging or amalgamating company were held by him shall be adjusted against the minimum vesting period required under this clause;”

8. The company shall have a freedom to determine the lock in period of such shares issued;

9. The employees shall not have a right to vote or receive dividend or enjoy any other benefit as a shareholder on such shares issued, till the shares are issued on exercise of option;

10. The amount payable by the company at the time of grant of option may be - 

Ø  forfeited by the company if the option is not exercised the employee during the exercise period;

Ø  the company may refund the amount to the employee if the option is not vested due to non fulfillment of conditions related to the vesting of option under ESOS.

11. The option granted shall not be transferable to any other person;

12. The option granted shall not be pledged, hypothecated, mortgaged, encumbered or alienated in any other manner;

13. No person other than the employees to whom the option is granted shall be entitled to exercise the option.

14. In case of death of employee during the employment, all the options granted to him shall till such date shall vest in the legal heirs or the nominees of the deceased;

15. Where the employee suffers permanent incapacity, all the options granted to him til the date of incapacity, shall vest in him on that day;

16. In case of resignation or termination, all the options not vested in him as on that day, shall stand expired.

However the employee can exercise the options granted to him which are vested within such period, subject to the terms and conditions under the scheme, as specified by the Board;

17. The following points shall be disclosed in the Board Report;

a.    options granted;

b.    options vested;

c.    options exercised;

d.    the total number of shares arising as a result of exercise of option;

e.    options lapsed;

f.     the exercise price;

g.    variation of terms of options;

h.    money realized by exercise of options;

i.      total number of options in force;

j.      employee wise details of options granted to;

·         KMP;

·         any other employee who receives a grant of options in any one year of option amounting to 5% or more of options granted during that year;

·         identified employees who were granted option, 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;

18. The company shall maintain a Register of Stock Options in Form No. SH-6 and enter the particulars related to the options granted on preferential basis as mentioned in Rule 13 Companies (Share Capital and Debentures) Rules, 2014;

19. The register of stock option shall be maintained at the registered office of the company or any other place as decided by the Board;

20. The entries in the Register of Stock Options shall be authenticated by CS or any other person authorised by the Board;

21. In case of listed companies, where the shares are listed on any stock exchange, the ESOS share be issued in accordance with the regulations framed by SEBI.

References: Companies Act, 2013

Contact:

CS Divyanshu Bansal
Email ID: divyanshubansal401@gmail.com