1. SEBI (ESOP & ESPS) GUIDELINES
S.G.N
SEBI (ESOP & ESPS) GUIDELINES
SEBI (BUYBACK OF EQUITY SHAES) REGULATIONS
Presentation by:
CS ANUP KUMAR SHARMA
VICE PRESIDENT
VC CORPORATE ADVISORS PVT. LTD.
(Category I) MERCHANT BANKERS

2. Equity as a mode of compensation is cost effective for employer
Equity as Compensation
Equity as an asset class is a time tested tool that provides one of the best opportunities for wealth creations
Equity as a mode of compensation is cost effective for employer
Sense of ownership, particularly at a senior level

3. What it does
Market pays, not the company from its cash kitty
Attraction and retention of talent for positions of substantial responsibility
Creates commonality of interest between employees and shareholders
Provides great incentive and motivation to employees
Offers most tax efficient compensation for employees

5. Who is an employee?
a) A permanent employee of the company working in India or out of India; or
b) a director of the company, whether a whole time director or not ;or
c) an employee as defined in abovey, in India or out of India, or of a holding company of the company.

6. What is employee compensation?
It is 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:
the fair value of the option granted under an
Employee Stock Option Scheme; &
b) the discount at which shares are issued under Employee Stock Purchase Scheme.

7. Who is eligible to participate in ESOS?
>>>>An employee shall be eligible to participate in ESOS of the company
>>>> An employee who is a promoter or belongs to the promoter group shall not be eligible to participate in the ESOS.
>>>>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

8. Salient Feature of ESOP
An option is given to employees to acquire equity shares (or other convertible securities) in the company after a future date but the price is fixed in advance;
The employee has the choice to decide whether to acquire the shares/convertible securities or not;
In case the employee opts for the shares, he has to exercise an option and pay the agreed price;
After the lock-in period (if any) the employee can sell the shares in the market and realize the gain;
The employees holding stock options do not have the right to receive dividend or vote or enjoy any other privileges of a shareholder till the shares are actually issued on exercise of option, after the completion of vesting period;
The options granted to the employees are not transferrable to any other person. The option granted to the employee cannot be pledged, hypothecated, mortgaged or otherwise alienated in any other manner

10. Various Stages in The ESOP Process
Grant – it means issue of stock options to employees under ESOP. The employees may be required to pay an upfront amount at time of grant of options, depending upon the provisions of the scheme framed by the company. The said amount is adjusted when the shares are allotted on exercise of option.
Vesting- Vesting means the process by which the employee gets the right to apply for and be issued shares of the company under the options granted to him. Till the vesting takes place, the employee does not have right to apply for the company’s shares. Upon vesting, the employee gets an unfettered right to apply for the issue of shares.
Vesting Period- it means the period during which the vesting of the options granted to an employee takes place. The SEBI guidelines provide that the vesting period shall not be less than one year from the date of grant of options.

11. Various Stages in The ESOP Process
Vesting percentage- it refers to that portion of the total options granted, which an employee is eligible to exercise. In other words, vesting of the entire lot of options granted can take place either in one stokes at the completion of a fixed period or it can be staggered or phased vesting.
Exercise period- it means the time period after vesting within which the employee should exercise his right to apply for the shares, otherwise the vested options would lapse. This period starts from the date of vesting of options.
Exercise- it means making of an application to the company by an employee together with the requisite amount, for issue of shares against the options already vested

13. ESOP Administration
Must constitute a Compensation Committee (CC) of the Board –to consist of majority independent Directors
Prescribed particulars must be disclosed to prospective Option grantee
CC responsible for framing policies and systems to ensure compliance with Insider Trading and Fraudulent and Unfair Trade Practices in Securities Market Regulations
CC shall formulate terms and conditions including:
- quantum of Options to be granted per employee and in the
aggregate
- conditions under which vested Options may lapse upon termination or misconduct
- exercise period both during employment and after termination
- mode of exercise: all at one time or in installments
- procedure for cashless excercise

15. ESOP Procedural – Flowchart
intimating allotment to
Concerned Employee
Convey allotment to CC
Drafting of ESOP Scheme
Consideration of ESOP Scheme
by Board & proposing
constitution of ‘Compensation
Committee’ (CC)
Hold BM for allotment of Shares
Entry into Register of Members
Employees exercising options –
forwdng application to CC
Reporting to:
ROC
RBI, if applicable
Consideration of ESOP Scheme
in EGM & authorisation for
Constitution of CC.
Communicate – Vesting period
Acceptance of Grant
Meeting of CC - determination
of eligibility criteria, exercise price,
vesting Period, exercise period etc.
Communicate – Grant of options
to Employees

16. Employee Stock Purchase Scheme
Employee Stock Purchase Scheme (ESPS)
means a scheme under which the company
offers shares to employees as part of a public
issue or otherwise. .

17. Shareholders Approval
Special resolution to be passed in General Body meeting
Notice shall specify:
Price of shares
No of shares offered
Eligibility
No of shares to be issued

18. Pricing and Lock-in
Shares issued under ESPS shall be locked in for a minimum period of one year from the date of allotment
If ESPS is part of public issue and if shares issued at same price to employees there is no lock in required
Company has a freedom to determine price of shares to be issued under ESPS provided they Conform to the provision laid down by company law

19. ADVANTAGES, DISADVANTAGES & LIMITATION OF ESOP
Awareness of company success
Employee commitment and satisfaction
Spurs change
Heightened decision making
Encourages reengineering
Disadvantages
Stock markets are highly volatile
ESOP can increase the financial risk of employees in case they over-invest in their company
The difference between the ‘fair value’ and the discounted ‘exercise price’ has to be treated as employee compensation and as such the same has to be debited to the profit and loss account of the company
In case the ESOP scheme has a lock-in-period after allotment of shares, then it leads to blocking of funds.
ESOP leads to dilution in the shareholding percentage of other shareholders including the promoter group.

20. Designing an ESOP Scheme

21. ESOP - Option Valuation

22. Compliances – Listing of Shares

23. Perspectives

24. When are they taxed? The ESOP is not taxed on acquiring the shares.
You are taxed on the profit you make when you sell the shares or transfer them.
Transfer here refers to when you gift it to someone or transfer it to someone else under an irrevocable deed (they now own it, not you).

25. FBT on ESOPs has been abolished
ESOPs have been included in the purview of Perquisites under Section 17 (2).
The value of the ESOPs determined on the date of exercise, as the difference between the fair market value of the shares as on the date of exercise and the exercise price, would be taxable as a perquisite
in the hands of the
employees.
In section 17 (2) of Income-tax Act, the following sub-clauses are being substituted for clause
(vi) with effect from the 1st
day of April,

27. What if they are listed and sold in India?
The taxability depends on the nature of gain at the time of sale. 
If you have a short-term capital gain, you have to pay tax at the rate of 10% (plus surcharge if applicable). 
Long-term gains are exempt from tax.
 What if they are listed and sold in India?

28. What if they are listed abroad and sold abroad?
This depends on whether you are a resident or non-resident Indian.
If you are a non-resident, it will not be taxable, as the gains occur outside India , unless the money is received in India.
If you are a resident in India, then you will be taxed on the gains.
Long-term capital gain is taxed at 20%.
Short-term capital gain is added to your overall income and taxed according to your slab rate
What if they are listed abroad and sold abroad?

29. Also the STT is leviable in abroad as per their rules.
If you sell your shares on or after October 1, 2004, you need to pay the Securities Transaction Tax in India. 
Also the STT is leviable in abroad as per their rules.
 Do I have to pay a security transaction tax if sold in India or abroad?

30. ESOP
Under the ESOP plan, companies provide their employees the opportunity to acquire the company's shares at a reduced price over a period of time. I
Infosys has given stock options worth Rs 50,000 crore till now

31. BUY BACK OF
SHARES

32. Meaning of Buy Back of Shares
There is no definition given by the Company Act, 1956 about the buy back of shares. But in simple words, we can say that buy back of shares means repurchase of its own shares by the company. In other words, buy back of shares means a company buying its own shares
Buyback is reverse of issue of shares by a company where it offers to take back its shares owned by the investors at a specified price; this offer can be binding or optional to the investors
It was opted by company if there was an addition funds with company and there is no profitable application where these funds can be invested.

33. Objective of Buy Back of Shares
Shares may be bought back by the company on account of one or more of the following reasons
To increase promoters holding.
Increase earning per share.
To maintain a target capital structure.
Support share value.
To prevent takeover.
To pay surplus cash not required by business.

34. SECTION
The provisions regulating buy back of shares are contained in Section 77A, 77AA and 77B of the Companies Act, 1956.
These were inserted by the Companies (Amendment) Act,1999.

35. The Securities and Exchange Board of India (SEBI) framed the SEBI (Buy Back of Securities) Regulations, 1999 and the Department of Company Affairs framed the Private Limited Company and Unlisted Public company (Buy Back of Securities) rules, 1999.
SEBI

36. Resources Of Buy Back Free reserves The securities premium account
The proceeds of any shares or other specified securities.

37. Conditions Of Buy Back The articles should permit buyback.
A special resolution should be passed in general meeting of the company authorizing buyback.
The buyback should be equal to or less than 25% of the total paid up capital and free reserves of the company.

38. All the shares for buy back should be fully paid up.
Buy Back should be in Accordance with the SEBI Regulations
The ratio of debt owned by the company should not be more than twice the capital and its free reserves, in that
particular financial year.

39. Before making purchases under buy back , a declaration of solvency in the prescribed form has to be filed with the ROC.
Affidavit has to be submitted.
Declaration should be signed by atleast two directors of the company.

40. Prohibition from further issue of securities within a period of two years.
The securities should be extinguished and physically destroyed within seven days of the last date of completion of buy back.
Maintaining a register of securities – the consideration paid , the date of extinguishing and physically destroying of securities etc.
Any default to comply with the requirements /rules is punishable

41. Prohibition of Buy Back
Through any/own subsidiary company
Through any investment company or a group of investment companies.
If the company has defaulted in respect of repayment.

42. Buyback under Companies Act : Snapshot
Conditions
Shareholders’ Buyback
Board Buyback
Enabling Provisions
Must be authorized by the Article of Association.
A Special Resolution of the shareholders must be passed. For listed companies it must be by way of a Postal Ballot.
Resolution of the Board of Directors.
Buyback Limits
25% of the total Paid-up Capital + Free Reserves; and
10% of the total Paid-up Equity Capital + Free Reserves.
(This limit is only for amount utilized in the buy back).
Not more than 25% of the total Paid-up Equity in that financial year.
(This limit is for No. of shares to be bought back in a financial year).

43. From Existing Shareholders on Proportionate basis.
Buyback under Companies Act : Snapshot
Manner of Buyback
From Open Market.
From Existing Shareholders on Proportionate basis.
From Odd Lots (i.e., where the lots of securities of a public company, whose shares are listed on a recognized stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange).
By Purchasing ESOP/ Sweat Equity shares.
Debt-Equity Ratio
Not More than 2:1 (Debt/ (Equity Capital + Preference Capital + Reserves) after the buyback.
Types of shares which can be bought back
Fully Paid-up.

44. Explanatory Statement to Notice calling the General Meeting
Buyback under Companies Act : Snapshot
Explanatory Statement to Notice calling the General Meeting
Must contain the prescribed details.
Not Applicable
Pricing
Free Pricing – No fixed basis
Date of Completion
Within 12 months of the Resolution.
Further Buyback
Not within 365 days from the date of buyback

45. Extinguishments of shares bought back
Buyback under Companies Act : Snapshot
Extinguishments of shares bought back
Within 7 days of the completion of Buyback.
Further Issue of Shares
A Further issue of the same kind of securities or u/s 81(1)(a) cannot be made within 6 months of the buy-back, except by way of Bonus, Sweat Equity, ESOP, conversion of financial instruments, etc.
Transfer to Capital Redemption Reserve
If the Buyback is made out of Free Reserves, then amount equal to the Nominal Value of shares bought back must be transferred to the Capital Redemption Reserve account.

46. SEBI Buy-Back of Securities by Listed Companies Regulation, 1998
A company can buy back its own securities by one of the following methods
From the existing shareholders on a proportionate basis through tender offer.
From Open Market
From odd Lot holder

47. To buy back securities, a company should be authorized by
Special Resolution under Section 77-A(2) of the companies Act
A resolution passed by its Board of Directors under Section 77-A(2)(b)(i).

48. Release of the Public Announcement (Regulation 8)
Filling of Offer Document.
Dispatch of letter of offer to security holders.

49. Contents of Explanatory Statement
The date of the meeting at which the proposal for buy-back was approved by the Board of Directors of the company.
The necessity of Buy-back.
The maximum amount required under the Buyback and the sources of funds from which the buy-back would be financed.
The basis of arriving at the buy-back price.
The number of securities that the company proposes to buy-back.

50. 7. a) The aggregate security holding of the promoter and of the director of the promoter. b) Aggregate number of equity purchased or sold by people. 8. A confirmation that there are no defaults in repayment of deposits, redemption of debentures or pref shares or repayment of term loans to any financial institution(s) or bank(s). 9.A report addressed to the board of Directors by the company's auditor.

51. Instances where Buyback should not be effected
A company shall not buy back its specified securities from any person through negotiated deals, whether on or of the stock exchange or through spot transactions or through any private arrangement. (Clause 4.2)
Any person or an insider shall not deal in securities of the company on the basis of unpublished information relating to buy-back of specified securities of the company. (Clause 4.3)

52. Methods of Buy Back
Purchasing form existing security holders on a proportionate basis (Tender Offer Method)
Purchasing from open market (Through Stock Market)
Purchasing from odd lot holders
To employees under Scheme of stock Option or Sweat Equity

53. Buy Back Through Tender Offer
Offer Procedure:
Time Period for offer: 10 Working Days
Letter of offer to security holders as on Record Date
Verification of offer: within 7 working days
Escrow Account
If the consideration payable dos not exceed Rs.100crores-25% of the consideration payable;
If the consideration payable exceeds Rs.100 crores-25% up to Rs.100 corers and 10% thereafter.
Payment to security holders
Company should make payment to security holders within seven days.

54. Document Required
Public announcement in English National Daily and Hindi National Daily
Draft letter of offer needs to be submitted to Board within 5 Working days of the pubic announcement
Declaration of solvency along with letter draft letter
Extinguishment of Certificate
Company shall extinguish and physically destroy the security certificate within the seven days from the date of acceptance
The particulars of the security certificates extinguished and destroy shall be furnished to the stock exchange where the specified securities of the company are listed within seven days of such act.
Company should maintain a record of security certificate which have been cancelled and destroyed.

55. Buy-Back from the open market Through Stock Exchange
Book-building Process

56. Buy Back Through Stock Exchange
Special Resolution in the Board meeting
It should not be made from the promoters of the company
Appoint Merchant Banker and make public announcement
Public announcement should be made at least seven days before the buy back
A copy of announcement should be filled with Board within 2 days along with specified fees

57. Contd…...
Public announcement should also contain disclosures regarding details of brokers and stock exchange
It should be done with electronic trading facility
Information regarding securities purchased and published same in a national daily
Identity of company shall appear on the electronic screen

58. Extinguishment of Certificate
(1) Extinguishment of certificates shall be applicable mutatis mutandis.
(2) The company shall complete
the verification of acceptances
within fifteen days of the pay-out.

59. Buy-Back Through Book Building
Special resolution in board meeting stating the maximum price for the buy-back
Company shall appoint a merchant banker and make a public announcement
And it should be made at least 7 days prior to buy back procedure
Specific amount shall deposit in escrow account
A copy of announcement should filed with board along with the fees

60. Contd…
Book building process shall be made though an electronically linked transparent facility
The number of bidding center should not be less than thirty
The offer for buy back shall remain open for notless than 15 days and not more than 30 days
Merchant banker and company will decide the
price based on acceptances received
The final buy back price would be the highest price accepted shall be paid.

61. Extinguishment of Certificate
Extinguishment of certificates shall be applicable mutatis mutandis.

62. Source :-Business Standard
Data dated :- 9th Nov 2011

63. SHARE BUY-BACK: POSITIE ASPECTS
It could enable a company to achieve its desired capital structure more quickly or facilitate a major restructuring.
It could avert a hostile takeover bid by reducing the number of shares in circulation

64. 3. Market generally interprets buy-back as a positive aspect.
SHARE BUY-BACK: POSITIE ASPECTS
3. Market generally interprets buy-back as a positive aspect.
4. Shareholders have a choice of deciding whether or not to receive the payout by selling or holding their shares, unlike a dividend payout.
5. Returning excess cash by way of a share buy-back gives a company greater flexibility with regard to it’s dividend policy.

65. POSITIVE SHARE BUY-BACK: NEGATIVE ASPECTS
Re-purchase of it’s own shares may conversely have a negative signaling effect.
Management may not seek to utilize any existing excess cash effectively
Possible mismanagements may arise if-
-Too high a price is paid for the re-purchased shares or if
-Cash resources are eroded to the level that could give rise to a risk of insolvency.
4. A return of funds by way of a share buy-back is less certain than an annual dividend stream.
POSITIVE

66. THANK YOU