Thursday, September 9, 2021

Procedure for Issue of Employee Stock Option Plan (ESOP)

ESOP (Employees’ Stock Option) is the option given to the directors, officers or employees of a company, its holding or subsidiary 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.

It is a right and not an obligation, therefore, if the shares of the company are valued at less than the exercise price of the option, then the employee need not exercise its right to buy the company’s shares.

Prerequisite for issue of ESOP:

i.            MOA to have adequate authorised share capital, if not, alter MOA accordingly by convening General Meeting

ii.          AOA to authorise issue of ESOP, if not, alter AOA accordingly by convening General Meeting

Process for issue of ESOP in an Unlisted Company:

i.                     Draft ESOP scheme

ii.                   Draft and send Notice for Board Meeting (min. 7 days’ notice)

iii.                 Convene Board Meeting to authorise via Board Resolution:

a.       Issue of shares under ESOP scheme

b.       Calling of General Meeting for approval of shareholder

c.       Issue of Notice of General Meeting

iv.       Call a General Meeting by sending Notice (min. 21 days’ notice) along with Explanatory Statement annexed therewith with the following disclosures:

a.       Total number of stock options to be granted;

b.       Classes of employees entitled to participate in the scheme;

c.       Requirements of vesting and period of vesting;

d.       Maximum period within which the options can be vested;

e.       Exercise price, exercise period and process of exercise;

f.        Lock-in period, if any;

g.       Maximum number of options to be granted per employee and in aggregate;

h.       Methods used for valuing its options;

i.         Conditions under which option vested may lapse;

j.         Statement that the company shall comply with the applicable accounting standards.

v.             Convene General Meeting and approve the scheme by passing Special Resolution (Ordinary Resolution for private company)

vi.          Separate Resolution is to be approved by the shareholders in case options are being granted to:

a.       Employees of subsidiary or holding company; or

b.   Identified employees, during any one year, equal to or exceeding one percent of the issued capital (excluding outstanding warrants and conversions) of the company

vii.            Grant options to the eligible employees

viii.           File Form MGT-14 with ROC within 30 days of passing the resolution

At the time of exercise of options:

i.                  Convene a Board Meeting to allot the shares under ESOP

ii.                Issue share certificates

iii.              Authorise stamping of shares

iv.            After allotment of shares, file Form PAS-3 (Return of Allotment) with ROC within 30 days of allotment

Disclose details of ESOP Scheme in the Director’s Report for the year:

i.                  Options granted/vested/exercised/lapsed;

ii.                Total number of shares arising as a result of exercise of options;

iii.              Exercise Price;

iv.               Variation of terms of options;

v.                 Money realized by exercise of options;

vi.              Total number of options in force;

vii.            Employee wise details of options granted

Maintain a Register of ESOPs:

To be maintained in Form SH-6 at the registered office of the company or such other place as decided by the Board.