checklist for issuing of ESOP for listed Company
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Checklist of Employees Stock Option Schemes:
1. Employee means
(a) a permanent employee of the company working in India or out of India or
(b) a director of the company, whether WTD or not or
(c) an employee as defined in sub-clause (a) or (b) of a subsidiary, in India or out of India or of a holding company of the company.
2. Employee compensation means the total cost incurred by the company towards employee compensation including basic salary, dearness allowance, other allowances, bonus and commissions including the value of all perquisites provided, but does not include:
(a) the fair value of the option granted under ESOS and
(b) discount at which shares are issued under an ESPS
3. Employee stock option means the option given to the whole-time Directors, Officers or employees of a company which gives them the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price.
4. ESOS means a scheme under which a company grants employee stock option.
5. ESPS shares means shares arising out of grant of shares under ESPS.
6. Exercise means making of an application by the employee to the company for issue of shares against option vested in him in pursuance of the ESOS.
7. Grant means issue of option to employees under ESOS.
8. Independent Director means a director of the company, not being a whole time director and who is neither a promoter nor belongs to the promoter group.
9. Intrinsic value means excess of the market price of the share under ESOP over the exercise price of the option (including up-front payment, if any).
10. Market Price means latest available closing price (at the stock exchange where there is highest trading volume) prior to date of Board meeting in which options are granted/shares are issued.
11. Promoter means:
(a) the person or persons who are in overall control of the company.
(b) the person or persons who are instrumental in the formation of the company or programme pursuant to which the shares were offered to the public.
(c) The person or persons named in the offer documents as promoter(s).
Provided that a director or officer of the company, if they are acting as such only in their professional capacity will not be deemed to be a promoter.
12. Promoter group means
(a) an immediate relative of the promoter (i.e spouse, parent, brother, sister or child of the person or of the spouse.
(b) persons whose shareholding is aggregated for the purpose of disclosing in the offer document “Shareholding of the promoter group”.
13. Share means equity shares and securities convertible into equity shares and shall include ADR, GDR or other depository receipts representing underlying equity shares or securities convertible into equity shares.
14. Vesting means the process by which the employee is given the right to apply for shares of the company against the option granted to him in pursuance of ESOS.
15. Vesting period means the period during which the vesting of the option granted to the employee in pursuance of ESOS takes place.
1. Employee shall be eligible.
2. Promoter or promoter group not eligible.
3. Director who either himself or through relatives or any body corporate, directly or indirectly holds more than 10% of the outstanding equity shares of the company not eligible.
1. Compensation Committee (majority independent director) to be constituted for administration and superintendence of the ESOS.
2. Disclosure as specified in the Schedule IV are made by the company to the prospective option grantee.
3. Compensation Committee shall inter alia formulate the detailed terms and conditions of the ESOS including:
(a) the quantum of option to be granted under an ESOS per employee and in aggregate
(b) conditions under which option vested in employees may lapse in case of termination of employment for misconduct
(c) the exercise period within which the employee should exercise the option and that option would lapse on failure to exercise the option within the exercise period.
(d) the specified time period within which the employee shall exercise the vested options in the event of termination or resignation of an employee
(e) the right of an employee to exercise all the options vested in him at one time or at various points of time within the exercise period.
(f) the grant, vest and exercise of option in case of employees who are on long leave
(g) the procedure for making a fair and reasonable adjustments to the number of options and to the exercise price in case of corporate actions such as rights/bonus shares, merger, sale of division and others
4. The Compensation Committee shall frame suitable policies and systems to ensure that there is no violation of:
(a) SEBI (Insider Trading) Regulations, 1992 and
(b) SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995.
1. Special Resolution of the shareholders required.
2. Explanatory Statement shall contain the following:
(a) total no. of options to be granted
(b) identification of classes of employees entitled to participate in ESOS
(c) requirement of vesting and period of vesting
(d) maximum period within which the option shall be vested
(e) exercise price or pricing formula
(f) exercise period and process of exercise
(g) the appraisal process for determining the eligibility of employees to the ESOS
(h) maximum number of options to be issued per employee and in aggregate
(i) a statement to the effect that the company shall conform to the accounting policies specified in clause 13.1
(j) the method which the company shall use to value its options whether fair value or intrinsic value
(k) In case company calculates employee compensation cost using intrinsic value of the stock options, a statement that the diff. between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed in the Directors Report and also the diff. on profits and on EPS shall also be disclosed in the Directors Report.
3. Approval of shareholders by way of separate resolution in case of:
(a) grant of option to employees of subsidiary or holding company
(b) 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.
Variation of terms of ESOS
1. Company by Special Resolution in general meeting vary the terms of ESOS offered but not yet exercised by the employees provided such variation is not prejudicial to the interests of the option holders.
2. Company may re-price the options which are not exercised (whether vested or not), if ESOS were rendered unattractive due to fall in the price of the shares in the market provided approval of shareholders obtained and not detrimental to the interest of employees.
1. Companies granting option to its employees pursuant to ESOS will have the freedom to determine the price subject to confirming to the accounting policies specified in clause 13.1 provided that in case company calculates employee compensation cost using the intrinsic value of the stock options, the diff. between the employee compensation so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed in the Directors Report.
Lock-in period and rights of the option-holder
1. Minimum period of one year between the grant of options and vesting of option
2. The company shall have the freedom to specify the lock-in period for the shares issued pursuant to exercise of option.
3. No right to receive any dividend or other benefits till shares are issued on exercise of option.
Consequence of failure to exercise option
1. The amount payable by the employee, if any, at the time of grant of option:
(a) may be forfeited by the company if the option is not exercised by the employee within the exercise period or
(b) the amount may be refunded to the employee if the option are not vested due to non-fulfillment of condition relating to vesting of option as per the ESOS.
Non-transferability of option
(a) No person other than employee to whom the option is granted shall be entitled to exercise the option
(b) Under the cashless system of exercise, the company may itself fund or permit the empanelled stock brokers to fund the payment of exercise price which shall be adjusted against the sale proceeds of some or all the shares, subject to the provisions of the companies Act.
(c) Option granted shall not be transferable to any person.
(d) Option granted to the employee shall not be pledged, hypothecated, mortgaged or otherwise alienated in any other manner.
(e) In the event of death of employee while in employment, all the option granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.
(f) In case the employee suffers a permanent incapacity while in employment, all the option granted to him as on the date of permanent incapacitation shall vest in him on that day.
(g) In the event of resignation or termination of the employee, all option not vested as on that day shall expire. However, the employee shall, subject to the provision of clause 5.3(b) shall be entitled to retain all the vested options.
Disclosure in the Directors Report
1. The following details of ESOS shall be disclosed in Directors Report:
Option granted, pricing formula, option vested, option exercised, total no. of shares arising as a result of exercise of option, options lapsed, variation of terms of options, money realized by exercise of options, total no. of options in force, employee-wise details of options granted to- senior managerial personnel, any other employee who receives a grant 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; diluted EPS
2. Until all options granted in the three years prior to the IPO have been exercised or have lapsed, disclosures shall be made either in the Directors Report or annexure thereto, also the impact on the profits and on the EPS will be disclosed.
1. Every company which has passed resolution for an ESOS under clause 6.1 of these guidelines shall comply with the accounting policies specified in Schedule I.
2. Where a scheme provides for graded vesting, the vesting period shall be determined separately for each portion of the option and shall be accounted for accordingly.
Certificate from Auditors
Board shall at each AGM place before the shareholders a certificate from the Auditors of the Company that the scheme has been implemented in accordance with these guidelines and resolution of the company in the general meeting.
Options outstanding at Public Issue
1. The provisions of the SEBI (DIP) 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.
2. If any option is outstanding at the time of IPO, the promoters contribution shall be calculated with reference to the enlarged capital which would arise on exercise of all vested options.
3. If any pre-IPO ESOS are outstanding at the time of IPO, the IPO document of the company shall disclose all the information specified in Clause 12.1 together with other information.
1. Explanatory Statement shall specify:
(a) the price of the shares and also the number of shares to be offered to each employee
(b) the appraisal process for determining the eligibility of employee for ESPS
(c) total no of shares to be issued
(d) the no. of shares offered may be different for different categories of employees
(e) special resolution shall state that the company shall conform to the accounting policies specified in Clause 19.2
(f) separate resolution in case of: allotment of shares to employees of subsidiary or holding company and allotment of shares 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 allotment of shares.
Pricing and Lock-in
1. Company shall have the freedom to determine price of shares to be issued under an ESPS, provided they confirm to the provisions of clause 19.2
2. Shares issued under an ESPS shall be locked in for a minimum period of one year from the date of allotment. Provided that in case where shares are allotted by a company under a ESPS in lieu of shares acquired by the same person under an ESPS in another company which has merged or amalgamated with the first mentioned company, the lock-in-period already undergone in respect of shares of the transferor company shall be adjusted against the lock-in required under this clause.
3. If the ESPS is part of a Public Issue and the shares are issued to employees at the same price as in the public issue, the shares issued to employee pursuant to ESPS shall not be subject to any lock-in.
Disclosure and accounting policies
1. The Directors report shall contain following disclosures:
(a) the details of the number of shares issued in ESPS
(b) the price at which such shares are issued
(c) employee-wise details of the shares issued to- senior managerial personnel, any other employee who is issued shares in any one year amounting to 5% or more shares issued during that year, identified employees who were issued shares during any one year equal to or exceeding 1% of the issued capital of the company at the time of issuance
(d) diluted EPS
(e) consideration received against the issuance of shares
2. Every company that has passed a resolution for an EPS under clause 17.1 of these guidelines shall comply with accounting policies specified in Schedule II.
Nothing in these guidelines shall apply to shares issued to employees in compliance with SEBI Guidelines on Preferential Allotment.
1. The shares arising pursuant to an ESOS and shares issued under an ESPS shall be listed immediately upon exercise in any recognized stock exchange subject to compliance with the following:
(a) The ESOS/ESPS is in accordance with these Guidelines
(b) In case of an ESOS the company has also filed with the concerned stock exchanges, before the exercise of option, a statement as per Schedule V and has obtained in-principle approval from such Stock Exchanges.
(c) As and when ESOS/ESPS are exercised the company has notified the concerned Stock Exchanges as per the statement as per Schedule VI.
2. No listed company shall make any fresh grant of options under any ESOS framed prior to its IPO and prior to the listing of its equity shares (hereinafter in this clause referred to as ‘pre-IPO scheme’) unless-
(a) such pre-IPO scheme is in conformity with these guidelines and
(b) such pre-IPO scheme is ratified by its shareholders in general meeting subsequent to the IPO provided that the ratification under item (b) may be done any time prior to grant of new options under such pre-IPO scheme.
3. No change shall be made in the terms of options issued under such pre-IPO scheme, whether by re-pricing, change in vesting period or maturity or otherwise, unless prior approval of the shareholders is taken for such change, provided that nothing in this sub-clause shall apply to any adjustments for corporate actions made in accordance with these guidelines.
4. The ESOS/ESPS shares held by the promoters prior to IPO shall be subject to lock-in as per the SEBI (DIP) Guidelines, 2002.
5. The listed companies shall file the ESOS/ESPS Scheme through EDIFAR filing.
6. When holding company issues ESOS/ESPS to the employee of its subsidiary, the cost incurred by the holding company for issuing such options/shares shall be disclosed in the ‘notes to accounts’ of the financial statements of the subsidiary company.
7. In case the subsidiary reimburses the cost, both the holding & subsidiary shall disclose the payment or receipt, as the case may be, in the ‘notes to accounts’ to their financial statements.
Appointment of registered Merchant Banker
The Company shall appoint a registered Merchant Banker for the implementation of ESOS and ESPS as per these guidelines till the stage of framing the ESOS/ESPS and obtaining in-principal approval from the stock exchanges in accordance with clause 22.1(b).
ESOS/ESPS through Trust Route
In case of ESOS/ESPS administered through a Trust, the accounts of the company shall be prepared as if the company itself is administering the ESOS/ESPS.
(a) The fair value of a stock option is the price that shall be calculated for that option in an arm’s length transaction between a willing buyer and a willing seller.
Schedule IV- Disclosure Document
Part A: Statement of risks
Additional risk: concentration, leverage, illiquidity & vesting
Part B: Information about the company: business of the company, abridged financial information for last 5 years, risk factors, continuing disclosure requirement such as notice, annual report etc.