By Garima Singh July 29, Employee stock option plan ESOP or Equity incentive plan is the scheme used by the companies to give ownership interest to its employees. ESOP is regulated by Section 62 1 b of the Companies Act, and SEBI ESOS and ESPS Guidelines, The latest amendments in the guidelines were given by the SEBI in followed by an amendment in In this blog post we shall discuss the Employee Stock Option Plan and the various provisions related to the same.

ESOP or Employee Stock option Plan is an employee-owner method which provides ownership stake to its employees. This method is used by the organization to attract, encourage and retain its employees. The employees are given an option and it does not obligate the employee to accept this scheme.

An ESOP is an option given to its whole time directors and permanent employees the benefit or the right to purchase the stock of the company at a predetermined price. Thus giving ESOPs to employees helps the companies and even start-ups to attract potential employees, to retain and motivate the employees.

All the listed companies are regulated by the SEBI ESOS and ESPS Guidelines, and all the unlisted companies are regulated by the Rule 12 of Companies Share Capital and Debenture Rules, In this route the company issues equity shares of the company to the employees as and when they exercise the option.

In the trust route the company forms an Employee Welfare Trust for the administration of ESOP in the company. The company issues shares to the trust which is forwarded or transferred to the employees upon exercise of options. Procedure followed for the formulation of ESOPs through equity route.

ISSUE OF EMPLOYEE STOCK OPTIONS | AishMGhrana

Section 5 of the guidelines provide for the formation of a compensation committee. A compensation committee is formulated by the board of directors BOD and consist of a majority of independent directors. The Board of directors can also choose a merchant banker, however it is optional. This committee is set up to formulate detailed terms and conditions for the ESOP. The Compensation Committee frames a plan. The plan must be in accordance with the guidelines provided by SEBI.

The Compensation committee is for the administration and superintendence of the ESOP plan. After formulation of the plan by the compensation committee the BOD approves the plan.

In case the company is listed, the plan should have an approval from the respective stock exchange. The shareholders approve the plan through a special resolution. A separate resolution should be passed if there is grant of ESOP to employees of any subsidiary or holding company.

The shareholders should be provided with all the documents necessary for them to formulate an informed decision. The explanatory details shall disclose prescribed statements like number of shares issued, amount at which issued, lock-in period, exercise period, method of accounting etc. The company shall not vary from the terms of ESOP approved in any manner that will result in the detriment of the shareholders. The notice of variation should be given to the shareholders containing all the details of the variation and should also contain the employees who will be benefitted by the variation.

The variation should be approved by a special resolution in the general meeting. The option of reprising of the shares is given to the company if it is not detriment to the interest of the employees and the shareholders.

Their shall be a maximum of one year of lock in period.

The employee cannot enjoy any benefits of a shareholder like share in dividend or voting right until shares are issued on exercise option. The shares are not transferable. The employee cannot alienate the share in any manner.

In event of death of an employee the shares shall vest to the legal heir or the nominee of the deceased. In case of resignation or termination of the employee, all the rights vested in him can be retained. The plan should specify the time period within which the employee can exercise his option.

Guidelines | SECP

An employee terminated in case of misconduct will not have any vested right in the issued shares. Intrinsic value is the value at the date of grant. In Intrinsic value method the employee has no option to buy shares at a later period. Companies can choose from any of the above method. However, they have to disclose it in the general meeting and should also follow the accounting guidelines provided by SEBI in guidelines of The income is treated as perquisites which form part of the salary of the employee.

The employer is required to deduct TDS and the income is calculated as the difference between the fair value of each share and the market value. The gains arising out of ESOPs are capital gains. The capital gain is the difference between the sale price and the price at which it was awarded to the employee.

The tax should be paid in the year of the sale of ESOP. The main concern for ESOPs is dilution. With every share granted to the employee the shareholders share gets diluted. Sample ESOP policy plan can be accessed here.

ESOPs have proved to be very effective tools for both big companies and start-ups. Companies use these to retain their workforce and the talent whereas start-ups use these tools to hire fresh talent and to attract more workforce. These work as a boon for companies which cannot afford to pay high salary. Besides this the sense of ownership acts as a motivation for the employees to work hard and diligently. Securities and Exchange Board of India Employee Stock Option Scheme and Employee Stock Purchase Scheme Guidelines, ESOP , Companies Act , Equity Route , Valuation of Stock Option , Legal , Income Tax Act.

A related party is a director or key managerial personnel or their relative, or a firm or company in which they are interested, e. An OPC One Person Company as the name suggests is a company formed by a single person i.

The concept was introduced in the Companies Act of [2]. The objective behind introducing the concept of OPC was to provide a Related Party Transaction means a transaction wherein the parties involved are related to each other in a way or the other. Company Act, has defined the term related party.

Employee Stock Options Basics Malaysia | Donovan & Ho

Home Blog Employee Stock option Plan. Introduction Employee stock option plan ESOP or Equity incentive plan is the scheme used by the companies to give ownership interest to its employees. Benefits of ESOP It keeps the employees motivated as direct stakes are involved. It gives a sense of ownership. Who is an employee? According to the guidelines provided by SEBI an employee is: The ESOPs can be issued through two routes Equity Route Trust Route Equity Route In this route the company issues equity shares of the company to the employees as and when they exercise the option.

Trust Route In the trust route the company forms an Employee Welfare Trust for the administration of ESOP in the company. Procedure followed for the formulation of ESOPs through equity route Step 1- Constitution of Compensation committee Section 5 of the guidelines provide for the formation of a compensation committee. Step 2- Framing of the plan The Compensation Committee frames a plan.

Corporate Updates: Draft Documents For ESOP

Step 3- Presentation to the BOD and approval After formulation of the plan by the compensation committee the BOD approves the plan. Step 4- Approval of Shareholders The shareholders approve the plan through a special resolution. Step 5- All necessary information The shareholders should be provided with all the documents necessary for them to formulate an informed decision. Variations in the terms of ESOP The company shall not vary from the terms of ESOP approved in any manner that will result in the detriment of the shareholders.

Lock in period Their shall be a maximum of one year of lock in period. Transferability of shares The shares are not transferable. Valuation of Stock Option There are two methods used in the valuation of the stock option. Intrinsic value method Fair value method Intrinsic Value Method Intrinsic value is the value at the date of grant. Taxation of ESOP Income tax should be paid in two situations At the time of giving ESOPs The income is treated as perquisites which form part of the salary of the employee.

At the time of sale of ESOPs The gains arising out of ESOPs are capital gains. Disadvantages of ESOPs The main concern for ESOPs is dilution. Conclusion ESOPs have proved to be very effective tools for both big companies and start-ups. Please Login or Register to Submit Comment. Related Party Transaction Simplified. A 4th year student of W. S, Kolkata What is a related party?

By Satchit Bhogle July 27, Everything you need to know. By Gabriella Ruhil December 30, Laws Regarding Related Party Transaction under the Companies Act, By Arunesh Bhardwaj July 29, Tax and Accounting Law 1. Intellectual Property Law 4. Why not create one now for free in under 10 minutes! Company Home About Us Contact Us Careers. Lawyers How it works Claim profile Sign up FAQ. Clients How it works Ask Legal Query Find A Lawyer Post A Case FAQ.