"Disclosure Stock Purchase"
Employee Stock Option Scheme Legislative Framework The section 79A of Companies Act, 1956 SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India ) Regulations ,2000 Guidelines for The Issue Of ADR/GDR Linked Employee Stock Option By The Indian Companies, vide press note dt. 15.9.2000 and RBI Circular in brief (No. 38 dated 3rd December 2003) Definitions Employee Stock Option Scheme (ESOS) : A right given to employees to purchase / subscribe the securities of the company at a future date at a predetermined price Employee Stock Purchase Scheme (ESPS) : A right given to employees to purchase offered securities of the company as part of a public issue or otherwise Shares “Share" means equity shares and securities convertible into equity shares and shall include American Depository Receipts (ADRs), Global Depository Receipts (GDRs) or other depository receipts representing underlying equity shares or securities convertible into equity shares. Exercise price means the price payable by the employee for exercising the option granted to him in pursuance of ESOS. Market price Means the latest available closing price, prior to the date of the meeting of the Board of Directors in which options are granted/shares are issued, on the stock exchange on which the shares of the company are listed. If the shares are listed on more than one stock exchange, then the stock exchange where there is highest trading volume on the said date shall be considered. Intrinsic value Means the excess of the market price of the share under ESOS over the exercise price of the option (including up –front payment, if any 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. Vesting period Means the period during which the vesting of the option granted to the employee in pursuance of ESOS takes place. Grant Means issue of option to employees under ESOS. Eligibility A permanent employee of the company working in India or out of India A director of the company, whether whole time director or not A permanent employee or a director of a subsidiary in India or out of India A permanent employee or a director of a Holding Company Disqualification An employee who is a promoter or belongs to promoter group A director who either by 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 shall not be eligible to participate in the ESOS. (Promoter is a person(s) - who is in over all control of the company - who is instrumental in the formation of the company - is named so in the offer document Promoter group includes immediate relatives of the promoter i.e. spouse, parent, brother, sister or child of the person or of the spouse) Rights / Limitations of the option holder The employee will not have right to receive dividend or to vote or to enjoy any other benefit of shareholder, till shares are issued to him on exercise of the option Option given to the employee is non transferable Only the employee to whom option is given can exercise the option Option given to the employee can not be pledged, hypothecated, mortgaged or otherwise alienated in any manner Effect of certain events on rights of the option holder Death of the employee while in employment: All the option granted to him till such date shall vest in the nominee or legal heir of the deceased employee Employee suffers permanent incapacity while in employment: All the option granted to him till such date shall vest in him on that day Resignation or Termination of the Employee: All the options not vested as on that date shall expire. However, subject to the conditions of scheme he will be entitled to retain all the vested option Consequences of failure to exercise the option Amount payable by employee at the time of grant of option may be forfeited, if option is not exercised with in exercise period The amount may be refunded to the employee, if option is not vested due to non fulfillment of the conditions relating to vesting of option Lock-in-period There shall be a minimum period of one year between grant of option and vesting of option Company is free to specify a greater period The company has freedom to specify the lock- in-period for the shares issued in pursuant to the exercise of the option Pricing of ESOS/ESOP Companies granting stock option (ESOS) can freely determine the exercise price, subject to confirming to the accounting policies prescribed in schedule-I Companies granting purchase option (ESPS) can freely determine the exercise price, subject to confirming to the accounting policies prescribed in schedule-II Compensation Committee No ESOS can be offered by a listed company unless a Compensation Committee is constituted Committee consist of majority of independent directors Duties: administer and supervise the scheme formulate the detailed terms and conditions of the scheme frame policies and system to ensure that there is no violation of SEBI (Insider Trading) Regulations, 1992 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulation, 1995 Shareholder’s Approval By way of Special Resolution in a general meeting A separate resolution in general meeting is required in case of grant of option to a subsidiary or a holding company to an identified employees, during any one year, equals to or exceed 1% of the issued capital of the company at the time of grant of option. Procedural aspect regarding approval of share holders Explanatory statement to the notice and resolution proposed to be passed in general meeting needs to contain following information: The total number of options to be granted. The identification of the class of employees entitle to participate in the option The appraisal method to be followed to determine the eligible employees. The maximum number of options to be granted to each employee and in aggregate The vesting period and process. The requirement of vesting and period of vesting The maximum period with in which the options shall be vested. The exercise period and process of exercise. The exercise price and pricing formula. A statement that the company shall follow the accounting polices prescribed. Procedural aspect Special resolution Appointment Merchant Banker Compensation Committee Documents required for obtaining in-principal approval Draft the Scheme for ESOP Before the offer is given, disclosure to the perspective option grantee is to be made in the form of “Disclosure Document”(Schedule IV) This shall be structured in three parts: Part A : Statement of risks Part B : Information about the company Part C : Salient features of the Scheme Before the exercise of option, a statement as per ScheduleV (Description of Stock Option Scheme) Copy of Stock Option Scheme/Amended Stock Option Scheme, certified by company secretary. Copy of Notice of AGM/EGM for approving the Scheme/for amending the Scheme, certified by the company secretary. Copy of resolution of shareholders for approving the Scheme/ for amending the Scheme, certified by the company secretary. List of Promoters as defined under the SEBI (ESOS & ESPS) Guidelines. Copy of latest Annual Report. Certificate of Auditor on compliance with SEBI (ESOS and ESPS) Guidelines. Specimen copy of Share certificate. Any other relevant documents. Listing of ESOS/ESPS Shares arising out of ESOS/ESPS shall be listed immediately upon exercise of option, in a recognized stock exchange where the securities of the company are listed. Conditions: Scheme is in accordance with guidelines In case of ESOS, the company has filed „Disclosure Document‟ with stock exchange and has obtained principle approval of the stock exchange. When option was exercised, company has notified stock exchange in a prescribed form Schedule VI. Company shall make application to Central Listing Authority for listing of shares A listed company shall file the scheme through EDIFAR filing A registered Merchant Banker will be appointed for implementation of the scheme till the stage of framing the scheme and obtaining principle approval Variation in the terms of option Any variation in the terms of the ESOS which may be detrimental to the interest of the employees, can not be done. Subject to the above mentioned rule, company can vary the terms with the approval of shareholders by way of special resolution in a general meeting. The notice of passing special resolution must disclose: Full details of the variation The rational thereof Details of the employees who are beneficiary of such variation Company may reprice the options not yet exercised (whether vested or not) if ESOS has become unattractive due to fall in the market price of the shares. That means upward revision of price is not possible. Disclosures In the case of ESOS, a „Certificate from the auditors‟ of the company shall be placed, before the shareholders, at each annual general meeting that the scheme has been implemented in accordance with these guidelines and the resolution passed by the company in the general meeting. Disclosures (Cont. 1) Director‟s report shall disclose following details: Options granted, vested, exercised, lapsed, in force and pricing formula The number of shares arising on exercise of the option and money realized on the exercise of option The variation of terms of option, if any. The employee wise details of options granted to * Senior management personnel. * Any other employee who gets more than 5% of the options granted in any one year. * Identified employees who are granted options of more than 1% of the issued capital at the time of grant of option. Disclosures (Cont. 2) Diluted EPS calculated as per Accounting Standard 20. If the company follows intrinsic value for arriving employee compensation cost, the difference in employee compensation cost if fair value had been used shall be disclosed. The impact of such difference on profit and EPS. Weighted average exercise price and weighted average fair value of the options. The description of the method and assumptions used to estimate the fair value. Method of Valuation of option. Stock Option to NRI Whether issued to non resident employees of its joint venture or its wholly owned subsidiary abroad directly or through trust must satisfy the following conditions: Scheme should be in accordance with the SEBI Guidelines. Face value of the shares to be allotted to non resident employees does not exceed 5% of the paid up capital of the issuing company. ADR/GDR linked Stock Options Companies Eligible under Automatic Approval Route of RBI: Information Technology Entertainment Software Pharmaceuticals Biotechnology Any other activities within the knowledge based sector as notified by the government from time to time. Conditions as per RBI Circular No. 38 dated 3 rd December, 2003 Scheme should be in accordance with the SEBI Guidelines. Face value of the shares to be allotted to non resident employees does not exceed 5% of the paid up capital of the issuing company. Compliance with the RBI (To be submitted within 30 days from the date of issue of shares): names of persons and number of shares allotted certificate from the company secretary of the issuing company Taxation Aspect (Amended as per Finance Bill 2007) ESOP brought under the purview of FBT Two stage tax applicability on ESOPs:- When the employee exercises the options – FBT (Employer’s Liability) When the employee sells the shares – Capital Gains (Employee’s Liability) Tax liability (FBT) will arise, as and when the options will converted into shares and same will be payable by employer An option is a right but not an obligation given to the employee to purchase shares at discount to market price Thank You