Employee Stock Option Scheme CS Khusbu Mohanty

Meaning "Employee Stock Option” means the option given to the whole-time Directors, Officers or employees of a company which gives such Directors, Officers or employees, the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price. It may be noted that the term employee includes permanent employee of the company working in India or out of India or a director of the company, whether a whole time director or not.

Background Mr. Louis Orth Kelso from U.S.A recognized as inventor and pioneer of the Employee Stock Ownership Plan. He created the first ESOP Plan (Scheme) in 1956 for a closely-held newspaper chain where the retiring owners sold their shares to the employee.

Indian Scenario Indian Companies has accepted and adopted ESOPs in the early 90''s when the IT Companies, Manufacturing Companies and the Companies engaged in the business of providing services has started coming with various ESOP Plans.

Incentive Tool ESOP is used as an incentive plan for the employees, helps to retain the employees and to reduce the attrition rate.

Legislative Framework Companies Act, 1956 SEBI (ESOP&ESPS)Guidelines, 1999

Eligibility A permanent employee Whole time Director, Part Time Director, Independent Director, Nominee Director. However, an employee who is a promoter or belongs to the promoter group and/or 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 are not eligible to avail ESOP. Contd…

In case of nominee director, the contract/ agreement entered into between the institution nominating its employee as the director of a company and the director so appointed shall, inter-alia, specify the following:  whether options granted by the company under its ESOS can be accepted by the said employee in his capacity as director of the company;  that options, if granted to the director, shall not be renounced in favour of the nominating institution; and  the conditions subject to which fees, commissions, ESOSs, other incentives, etc. can be accepted by the director from the company.

Important Terminology  “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.  “Vesting period" means the period during which the vesting of the option granted to the employee in pursuance of ESOS takes place.  “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.  Exercise period" means the time period after vesting within which the employee should exercise his right to apply for shares against the option vested in him in pursuance of the ESOS. “

ESOP Process Granting Vesting Exercise

Example  Option granted by ABC LTD. to its’ employee A shares on July 23,  This 1500 shares granted to A will be vested on July 23, From this day till the expiry of exercise period, ‘A’ can exercise this options.  If A decides to exercise this options, then shares issued to ‘A’ on his exercise shall be listed on the exchange.

Administration of ESOP- Compensation Committee  The company constitutes a Compensation Committee for administration and superintendence of the ESOS.  The Compensation Committee shall be a Committee of the Board of directors consisting of a majority of independent directors.

Routes of ESOP  Direct Route  Trust Route

Direct Route  Company form Compensation Committee.  Issue fresh shares for ESOPs.  After Vesting Period employee can exercise the option.  On exercise an option the company issue the shares to the employees.

Trust Route  Company form an Employee Welfare Trust.  Trust either buy shares from the open market or Company Issues fresh shares to the trust.  After Vesting Period employee can exercise the option.  On exercise the option trust transfer the shares to the employees.  Trust repay the loan to the company.

Vesting & Listing  There shall be a minimum period of one year between the grant of options and vesting of option.  Shares vested, exercised and issued under an ESOP shall be listed immediately upon exercise in any recognized stock exchange where the securities of the company are listed.

 Transferability of Options Non transferable  Pledging of Options Can not be pledged, hypothecated, mortgaged or otherwise alienated in any other manner.

Entitlement of Vested Option Death All the option granted to an employee till the date of death shall vest in the legal heirs or nominees of the deceased employee. Permanent Incapacity All the option granted to employee as on the date of permanent incapacitation, shall vest in him on that day. Contd….

Entitlement of Vested Option Resignation or termination All options not vested as on that day shall expire. However, the employee shall, subject to the policy formulated by compensation Committee in this regard shall be entitled to retain all the vested options. Renunciation by Nominee Director The options granted to a director, who is an employee of an institution and has been nominated by the said institution, shall not be renounced in favour of the institution nominating him.

Consequences of failure to exercise options The amount payable by the employee, if any, at the time of grant of option;-  may be forfeited by the company if the option is not exercised by the employee within the exercise period; or  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.

Survey Out of the total 6,299 Companies listed on BSE, only 427 (i.e. 6.77%) companies have so far given ESOPs to their employees. Out of aforesaid 427 companies, around 34% companies has allotted ESOP during last 3 years only. Source:

Thank You Disclaimer Clause: Views expressed in this presentation views of the author do not necessary reflect those of the Institute.