1. Long Term Employees Incentive Plans
NIRC-ICSI
February 20, 2016

2. Index Content A. Objective B. Options/Alternatives
C. Design Considerations
D. Market Trend
E. Regulatory Framework
F. Corporate Secretarial
G. How you can assist
H. Discussion
© 2016 Deloitte Haskins & Sells LLP

3. Objectives

4. Stock Rewards – Objectives
Attracting Talent and Retention of Talent
Motivation and Internal Commitment
Ownership and belongingness
Creating Performance Driven Culture
Wealth Sharing and Wealth Creation
Promoting Corporate Performance
O B J E C T I V E S
Creating Value for the employee

5. Description of LTI’s Stock purchase plan
Mirrors an investment plan towards purchase of company stock at a discount
Stock Options/ Phantom Stock
Rights to purchase a given number of shares at a price determined at grant. Rewards participants for upside created after grant date
Restricted Stock Outright grant of shares to an employee at zero cost with prohibitions on the sale based on continued service
Performance Share Plan Plan where a target number of shares is established at beginning of the performance period, with the value of the share and the final number of shares awarded varying based on performance metrics
Performance Cash Plan
Plan where a target amount of cash is established at beginning of the performance period, with the value of the share and the final number of shares awarded varying based on performance
© 2016 Deloitte Haskins & Sells LLP

6. Type of Stock Based Incentive Options
ESOP
ESPS
Sweat
Equity
SARs
A right but not an obligation granted to Employees to acquire shares at pre-agreed price subject to vesting period and other terms and conditions.
Employees are offered upfront shares
Employees are offered upfront shares based on IPRs/Value Additions etc.
Employees are offered shares based future cash payment based on incremental value of Shares.
© 2016 Deloitte Haskins & Sells LLP

7. Design Consideration…
Accounting/ Taxation
Company Vs. Employee
Award Size
Grant Price
Type of Plan
& Dilution
Vesting
Schedule
Exercise
Period
Administrative Mechanism
Terminal Condition
Eligibility
Design Consideration
© 2016 Deloitte Haskins & Sells LLP

8. Selective employees – 87%
Market Trends… 01
Type of long term investment plan being used
Which plan?
ESOP– 70%
ESPP– 10%
SAR– 10%
RSU–7%
RSA–2% 02
The plan is for selective employees or applicable across
For whom?
Selective employees – 87%
All employees – 13% 03
Award criteria used for long term incentive plan
Level of employee – 90%
Performance – 75%
Tenure – 90%
How much? 04
Vesting period, Exercise period and Lock-in period for stock options
When? 05
At what price are the employees given these stock options
What price?
At market price
51%
Less than market price
23%
Face value
19%
FMV 5%
Book value 2%
© 2016 Deloitte Haskins & Sells LLP

9. Regulatory Framework
© 2016 Deloitte Haskins & Sells LLP

10. Regulatory Framework Corporate Secretarial Companies Act, Requirements
2013
Securities Laws & Regulations
Accounting and Tax Implications
Foreign Exchange Management Act, 1999
Stamp Laws
© 2016 Deloitte Haskins & Sells LLP

11. Companies Act, 2013- Key Features
“Employees’ stock option” means the option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, 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.
Shareholder approval to be sought through Special Resolution(Ordinary Resolution, if Private Company) & compliance of other prescribed conditions in terms of rules/regulations under CA, 13
Disclosure and Reporting requirements on offer, issue and allotment of ESOP to be complied with in terms of regulations rules/regulations under CA, 13
Key Considerations:
Not option to be given to promoters of the Company
Fresh issue requires shareholders approval
Flexibility to administer the Scheme through a Trust. Even Funding to the Trust possible
Employee funding limited to 6 months salary including exemption of Section 185 & 186;
Flexibility in Payment facilities for the exercise price through deduction from salaries may be provided, upon written authorization from employee for such payroll deduction
Payroll deduction should be made in such a manner that it does not amount to a deposit/does not attract Companies (Acceptance of Deposits) Rules, 2014 (i.e. amount received not to exceed annual salary under employment contract in non-interest bearing security deposit)
© 2016 Deloitte Haskins & Sells LLP

12. SEBI (Share Based Employee Benefits) Regulations, 2014
Securities Laws & Regulations
© 2016 Deloitte Haskins & Sells LLP

13. Introduction
Effective October 28, 2014 an exhaustive Regulations governing various employee benefit schemes has been introduced . SEBI (Share Based Employee Benefits) Regulations, 2014 (SBEB Regulations) have replaced the earlier SEBI (ESOP & ESPS) Guidelines,1999.
New Regulations apply to all listed companies having an employee benefit scheme dealing in shares.
Key Objectives:
Replacing Guidelines with Regulations to ensure better enforceability
To regulate formation and operations of trusts for various employee welfare schemes
Align to internationally accepted practices of secondary market acquisitions and at the same time also ensure proper safeguards to avoid any misuse.
© 2016 Deloitte Haskins & Sells LLP

14. What’s New??? RBS SAR GEBS Trustees cannot vote on behalf of Trust
Regulation for Trust
NRC may act as Compensation Committee
Trust Shareholding- “Non-Promoter & Non-Public’ Category
Treatment of unappropriated shares held by Trusts
Separate Resolutions required in certain cases
Secondary Market Acquisitions permitted
© 2016 Deloitte Haskins & Sells LLP

15. New Definitions…
Appreciation:- Difference between the market price of the share of a company on the date of exercise of stock appreciation right (SAR) or vesting of SAR, as the case may be, and the SAR price;
Control: shall have the same meaning as defined under SAST
Emergency: means the need of funds by the trust to meet the commitment arising out of the objective of the Scheme.
Exercise: Making of an application by an employee to the company or to the trust for issue of shares or appreciation in form of cash, as the case may be, against vested options or vested SARs.
Exercise Price: Price, if payable by the employee for exercising the option or SAR granted to him;
General Employee Benefits Scheme (“GEBS”): Scheme of a company dealing in shares of the company or the shares of its listed holding company, for the purpose of employee welfare including healthcare benefits, hospital care or benefits, or benefits in the event of sickness, accident, disability, death or scholarship funds, or such other benefit as specified by such company;
Group: Two or more companies which, directly or indirectly, are in a position to:-
exercise 26% or more of the voting rights in the other company; or
appoint more than 50% of the members of the board of directors in the other company; or
control the management or affairs of the other company.
© 2016 Deloitte Haskins & Sells LLP

16. New Definition
Option: Option given to an employee which gives him a right to purchase or subscribe at a future date, the shares offered by the company, directly or indirectly, at a pre-determined price;
Retirement Benefit Scheme (“RBS”): A scheme of a company, dealing in shares of the company or the shares of its listed holding company, for providing retirement benefits to the employees subject to compliance with existing rules and regulations as applicable under laws relevant to retirement benefits in India;
Secondary Acquisition: Acquisition of existing shares of the company by the trust on the platform of a recognised stock exchange for cash consideration;
Stock Appreciation Right (“SAR”): A right given to a SAR grantee entitling him to receive appreciation for a specified number of shares of the company where the settlement of such appreciation may be made by way of cash payment or shares of the company;
Vesting: The process by which the employee becomes entitled to receive the benefit of a grant made to him under any of the schemes.
© 2016 Deloitte Haskins & Sells LLP

17. Share Based Benefit Schemes
Schemes Covered
Share Based Benefit Schemes
ESOS
ESPS
SAR
GEBS
RBS
ESOS Scheme under which a company grants employee stock option directly or through a trust.
ESPS Scheme under which a company offers shares to employees, as part of public issue or otherwise, or through a trust where the trust may undertake secondary acquisition for the purposes of the scheme
SAR SAR is a right (not transferable) given to an employee entitling him to receive appreciation for a specified number of shares
GEBS Scheme dealing in shares of the Co/its listed Holding Co for-Employee Welfare
RBS Scheme dealing in shares of the Co/its listed Holding Co for retirement benefits
© 2016 Deloitte Haskins & Sells LLP

18. Employee Stock Option Scheme (“ESOS”)
ESOS shall contain the details of the manner in which the scheme will be implemented and operated;
Disclosures, as specified by SEBI are required to be made by the company to the prospective option grantees
Details & Disclosures
Company is free to determine price of ESOS subject to compliance of ‘Guidance Note on Accounting for employee share-based Payments’ issued by ICAI
Pricing
1 Year;
Company may specify lock-in-period for the shares pursuant to exercise of options
Vesting Period
Employee shall not have right to receive any dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to him, till shares are issued upon exercise of option
Right of Option Holder
The amount payable by the employee, if any, at the time of grant of option may be forfeited by the Company or;
May be refunded to the employee if the options are not vested due to non-fulfilment of conditions relating to vesting of option as per the ESOS
Consequences of failure to exercise option
© 2016 Deloitte Haskins & Sells LLP

19. Employee Stock Purchase Scheme (“ESPS”)
Details
ESPS shall contain the details of the manner in which the Scheme will be implemented and operated;
Pricing
Free pricing subject to compliance of ‘Guidance Note on Accounting for employee share-based Payments’ issued by ICAI
Vesting Period
Minimum 1 Year;
If 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 employees pursuant to ESPS shall not be subject to lock-in
© 2016 Deloitte Haskins & Sells LLP

20. Stock Appreciation Right (“SAR”)
Details & Disclosures
Scheme should detail out the implementation and operationalization of Scheme;
Disclosures, as specified by SEBI are required to be made by the company to the prospective option grantees
Settlement
Flexibility to settle in Cash or Shares;
In case of equity settled SAR scheme, if the settlement results in fractional shares, then the consideration for fractional shares should be settled in cash.
Vesting Period
Minimum vesting period of1 year;
Rights of SAR Holder
No Voting or Dividend Right
© 2016 Deloitte Haskins & Sells LLP

21. General Employee Benefits Scheme (“GEBS”)
Details
Scheme to contain the details of the manner its implementation and operation;
Quantum
Maximum 10% of the book value or market value or fair value of the total assets of the scheme, whichever is lower, as appearing in its latest balance sheet
© 2016 Deloitte Haskins & Sells LLP

22. Retirement Benefit Scheme (“RBS”)
Details
RBS shall contain the details of benefits and the manner in which the scheme will be implemented and operated;
Disclosures, as specified by SEBI are required to be made by the company to the prospective option grantees
Quantum
Maximum 10% of the book value or market value or fair value of the total assets of the scheme, whichever is lower, as appearing in its latest balance sheet
© 2016 Deloitte Haskins & Sells LLP

23. 1 1 1 3 2 2 4 Life Cycle of ESOP Grant Exercise Sale Vesting
© 2016 Deloitte Haskins & Sells LLP

24. Modes of Administration- ESOP
Direct Route- through Compensation Committee
Trust Route- Secondary Market/Fresh Allotment
Trust Route ESOP - Flow Chart
Grant of Loan 1. 5.
Transfer of shares 3.
Grant of options
Acceptance of grant
Vesting happens
Exercise Period starts
Company
Trust
Employee
Direct issue of shares 2.
6. Repayment of Loan from exercise price paid by employee
Application for shares and payment exercise price 4.
© 2016 Deloitte Haskins & Sells LLP

25. Direct & Trust Route-Comparison
Pros
Dilution of Promoters holding protected.
Shares allotted through Trust are eligible to participate in any future buy-back scheme of the company
Purchase of shares can be undertaken with ease by Trust as opposed to buyback and subsequent issue by company
Non applicability of Preferential Issue Guidelines on the issue of shares under the ESOP/ESPS by the Company to the Trust
Sends out the right signals to the market about the company’s prospects
Cons
Issue of new shares by the Company would result in dilution of promoter holding.
Trust if controlled by the Company and/or by its principal shareholder or promoter or promoter group may be considered as persons acting in concert and therefore the Takeover code may apply.
Direct Route
Pros
Effective Control and administration
Non applicability of Preferential Issue Guidelines on the issue of shares under the ESOP/ESPS by the Company to the Trust
Cons
Issue of new shares result in dilution of promoter holding.
© 2016 Deloitte Haskins & Sells LLP

26. Secondary Acquisition & Fresh Allotment- Comparison
Parameters
Secondary Acquisition
Fresh Allotment
Administration through Trust
Mandatory
Optional
Ceiling per FY
2% of paid up capital as at PFY
Not Applicable
Maximum Holding
5% of paid up capital as at PFY when the Scheme have been approved by shareholders
Funding
Higher funding required as acquisition is at FMV
Nominal/ Nil
Lending of funds for acquisition of shares
Permitted, if approved by shareholders
Not Applicable – Generally Employees invest
Dilution of stake
No dilution of existing shareholders' stake
Proportionate dilution of existing shareholders’ stake
Time limit for holding additional shares, not backed by options granted
Till end of next year in which the shares were acquired
Lock in, on shares acquired by the Trust
Minimum – 6 months, unless they are transferred to employees or participating in exit offers offered to all shareholders, etc.
Listing of Shares
Already Listed
Immediately, on allotment
Additional shareholder approval
Specific approval for secondary acquisition
© 2016 Deloitte Haskins & Sells LLP

27. Management & Administration of Schemes
© 2016 Deloitte Haskins & Sells LLP

28. Compensation Committee
Constitution of Compensation Committee for administration and superintendence of the Scheme. However, where scheme is implemented by Trust, the Compensation Committee shall delegate its administrative powers to such trust
Company may designate any other committee such as NRC to act as Compensation Committee, if it fulfill the criteria mentioned above.
To formulate the detailed terms and conditions of the schemes
To frame suitable policies and procedures to ensure that Securities laws are complied with by the Trust and its employees.
To determine eligible employees for the purposes of the Schemes.
© 2016 Deloitte Haskins & Sells LLP

29. Implementation of Scheme Through Trust
Company may implement schemes either directly or by setting up an irrevocable trust(s) subject to following:-
Mode to be decided upfront at the time of taking approval of the shareholders;
If scheme involves secondary acquisition or gift or both, can only be possible through a Trust;
Company may implement several schemes through a single trust subject to keeping and maintenance of proper books of account, records and documents, for each such scheme by trust;
Promoter, Director, KMP, of the Company, its H/S or any relative such P/D/k; Holder of 10% of Shares of Listed Company cannot act as Trustee
Trust shall not deal in derivatives, and shall undertake only delivery based transactions;
Company may lend monies to the trust to acquire the shares through new issue/secondary acquisition;
Shareholding of the trust- ‘non-promoter and non-public’ shareholding; Trustee not to vote on behalf of trust;
Secondary acquisition in a FY by trust shall not exceed 2% of the paid up equity capital as at the end of PFY;
Mandatory filing of Trust deed / any modifications with Stock Exchange;
Minimum 2 Trustees if individuals or OPC appointed as Trustees except in the event a corporate entity is Trustee.
In case of winding up of the schemes, the excess monies or shares remaining with the trust after meeting all the obligations, if any, shall be utilised for repayment of loan or by way of distribution to employees as recommended by the compensation committee.
Trust to hold shares atleast for a period of 6 months if secondary acquisition subject to certain exception.
Trust shall not sell shares in secondary market except in specified events.
Trust can undertake off market transfer of shares in the event of transfer to employees as per Scheme, SAST, BB, other exit opportunities like BB, delisting etc. Trust to comply Insider Trading regulations.
© 2016 Deloitte Haskins & Sells LLP

30. Limits of Secondary Acquisition
Aggregate trust shareholding from secondary market at any point of time shall not exceed the following:
S. No
Particulars
Limits (%of paid up capital of FY preceding the year of obtaining shareholders approval) 1.
For ESOS, ESPS, & SARs 5% 2.
For GEBS & RBS 2% 3.
For all schemes in aggregate
Ceilings not applicable for new issues and gifts;
Ceiling limits to be taken together at company level and not for individual trust/scheme
© 2016 Deloitte Haskins & Sells LLP

31. Miscellaneous Provisions
Variation shall not be detrimental to the interests of the employees. However for regulatory requirements, any variation is permissible
Variation shall be made by passing Special Resolution for options not yet exercised;
Repricing of shares or SAR or options possible, if the scheme was unattractive due to fall in prices
Variation of terms of Scheme
Options, SAR or any other benefit shall not be transferable, pledged, hypothecated, mortgaged or alienated by any other means
In the event of death of employee, options, SAR or other benefits shall vest in the legal heir or nominee;
In case employee suffers permanent disability while in employment, all options, SAR or benefits shall vest with him on that day of
Non-Transferability
Merchant Banker to confirm SEBI compliances
Board of directors shall at each AGM place before the shareholders a certificate from the auditors of the company that the scheme(s) has been implemented in accordance with SBEB Regulations and in accordance with the resolution of the company in the general meeting
Merchant Banker
and Auditors Certfificate
un-appropriated inventory of shares which are not backed by grants, acquired through secondary acquisition by the trust for ESOS/ESPS/SAR shall be appropriated by the end of next FY
Un-appropriated inventory
© 2016 Deloitte Haskins & Sells LLP

32. Corporate Secretarial Requirements
Disclosure Requirements:
Details of the scheme shall be disclosed in the Board Report.
Disclosures as may be specified by SEBI shall be made to employees, before grant of options/shares/other benefits.
Where costs incurred by holding company for issuing option/share/SAR or benefits, or where subsidiary company reimburses such costs, the same shall be disclosed in the ‘notes to accounts’ of the financial statements of the subsidiary company.
Placing of auditor’s certificate (for compliance of SEBI Regulations) in each AGM.
Shareholders’ Approval:
Scheme shall be approved by the shareholders before the grant of options.
Separate shareholders resolution in case of (i) secondary acquisition; (ii) grant of option to employees of subsidiary/holding; (iii) grant of option to identified employees during any one year => 1% of issued capital at the time of grant.
Other Compliances:
Compliance as provided under SEBI (Prohibition of Insider Trading) Regulations, 2015.
To follow requirements of 'Guidance Note on Accounting for employee share-based Payments' (Guidance Note) or Accounting Standards as may be prescribed by the Institute of Chartered Accountants of India, including the disclosure requirements prescribed therein.
© 2016 Deloitte Haskins & Sells LLP

33. Disclosures under LODR, 2015
Disclosure in Special Resolution: Board shall recommend all fees or compensation paid to non- executive directors and it shall require approval of shareholders in general meeting. SR shall specify the limits for the maximum number of stock options that may be granted to non-executive directors, in any financial year and in aggregate
Annual Report : Disclosures in corporate governance report – w.r.t. stock options granted to directors
Material Event s: Options to purchase securities including any ESOP is a material event and should be reported to stock exchanges (as per Schedule III- Part A – Section B) as soon as reasonably possible and not later than 24 hours from the occurrence of event, if made after 24 hours such disclosures to provide explanation for delay
© 2016 Deloitte Haskins & Sells LLP

34. Foreign Exchange Regulations
Issue of shares under ESOP to NR (compliances as per FDI Policy to be adhered to):
Allotment of shares to non-resident employees to be under sectoral cap applicable to the Company;
FIPB approval in case issue of ESOP falls under approval route;
Pricing guidelines under FEMA not applicable to ESOPs;
Disclosures to the Reserve Bank of India;
30 days reporting in Form-ESOP with regard to the names of persons and number of shares issued under the ESOP
Filing of form FC-GPR, within 30 days from the date of allotment
Filing of form FC-TRS on transfer of shares by a Trust administering the ESOP
© 2016 Deloitte Haskins & Sells LLP

35. Accounting & Tax Implications, Stamp Duty
Accounting Implications:
Disclose the additional expenses on account of ESOP in the notes to accounts to the balance sheet
ICAI Guidance Note on ‘Employees Share Based Payments’ to be adhered to while ESOP accounting
Impact of Ind AS 102 – consolidation of trust accounts with Co. mandatory, method of accounting – fair value method to be used, only in exceptional cases intrinsic method can be used
Tax Implications:
Perquisite tax taxable in the hands of the employee at the time of exercise of shares as ESOP forms part of salary
Co. is required to withhold tax at source in respect of such perquisite
Capital gain tax (long term /short term) shall be taxable in the hands of the employee
Listed shares – STT is paid, no tax if held for more than 1 year, if held < 1 yr – 15.45%
Unlisted shares – if held > 3yrs – 20.60%, if < 3yrs taxed at rate of income tax slabs
Stamp Duty
Issue of Shares: As per State Stamp Act
Transfer of Shares: .25% of consideration on transfer of shares
© 2016 Deloitte Haskins & Sells LLP

36. Process Flow… Receipt of Cheque by NRC from the
Employee for exercise of options &
forward request to HR and
then to Board of Directors.
Drafting of ESOP Scheme
Holding BM for allotment of Shares
to the Employees
RBI reporting by Company- in case
options exercised by Non Resident
Employee
Convey allotment of shares to
NRC & HR
Consideration of ESOP Scheme
by Board of Directors & proposing
constitution of ‘Nomination &
Remuneration Committee’ (NRC)
When employees exercise his options –
forwarding application to NRC along
with Cheque/ DD for payment towards
exercise price
HR intimating allotment of shares to
Concerned Employee
Consideration of ESOP Scheme
in General Meeting & authorization
for constitution of NRC
Entry into Register of Members
Acceptance of Grant by Employee
Filing of Form MGT-14 for SR- ESOP with
Registrar of Companies (ROC)
Reporting to:
ROC (in Form PAS 3)
RBI – Form ESOP
Communication of Grant of
options to Employees by the
Company
Meeting of NRC for determination
of eligibility criteria, exercise price,
vesting Period, exercise period etc.
© 2016 Deloitte Haskins & Sells LLP

37. How you can assist…

38. You can assist in… Service offerings Selection of the best fit
Type of plan – ESOP/SAR
Direct Vs. Trust Route
Drafting of plan documents Assistance in:
Drafting the plan
Determination of the vesting period
Drafting Notices, Explanatory Statement, Resolutions and minutes
Drafting offer letters, acceptance letters and related undertakings from employees.
Implementation
Preparation of a compliance plan for execution of the ESOP
Assistance in execution of the plan
Roll out of plan
Employee communication and FAQ
Regulatory compliance Providing a memo on:
The implication under Companies Act, SEBI etc.
Tax implications on the employee as well as the company
Accounting implications
SEBI guidelines and valuation norms

39. Design the Stock Option Implementation Assistance
Your Approach
Phase I
Phase II
Design the Stock Option
Implementation Assistance
Regulatory
Roll out the plan post discussion with HR
Employee Communication
FAQ
Compliance with regulations
Execution
Plan
Rollout
Draft
Framework
Understand the objectives
Finalize the parameters and determine the preferred Route
Drafting of plan and related documents
Analyze
options
Broad Scope of services
Data
collation

40. Discussion Atul Mittal, Director Deloitte Heskin & Sells LLP.