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ESOPs: New Regulations
for Governance
How
When
ESOPs
Why
To
Whom
Where
ORIGIN
ESOP is the brainchild of a visionary economist named
Louis Orth Kelso, who pioneered this concept with the
vision to enable working people without savings to buy
stock in their Employer Company and pay for it out of its
future dividend yield
Kelso believed that the companys own employees
Should be the anlogical buyers and the ultimate owners;
They were the ones who made the business successful in
the first place and;
The ones who know the ins and outs of the business
better than anyone else in the industry.
PRESENCE IN INDIA
ESOPs first introduced in late 80s when Indian IT
Companies were facing the problem of poaching and brain
drain.
To address the said concerns, Wipro first brought the
concept to India & thereafter, Infosys, was the first to offer
stock options to employees when it went public in 1993
Around 43% of the IT companies have given ESOPs to
more than 90% of the employees.
Although in India ESOPs are used not as a Buyout plan but
more as a carrot with the intent to retain the employees and
to reduce the attrition rate.
Employee Stock Option Plan
(ESOP)
Employee Stock Option Plans/Equity Incentive Plans (commonly referred to as
ESOPs) are one of the most important tools to attract, encourage and retain
Employees. Nowadays, these ESOPs are being increasingly used as a
compensation tool by the Corporate Houses with the basic premise of creating
wealth for the Employees, on one hand and motivating Employees to have long-term
career aspirations in the Organization, on the other.
Extending benefits through ESOPs is like creating a win-win situation for
Employer & Employee:
Higher Productivity
Performance
Appraisal via ESOPs
Employer
Employee
Better Performance
Awarded Stocks
both
HOW INCENTIVE PLANS LEVERAGE THE PERSONAL WEALTH CREATION WITH
THE ORGANIZATION'S VALUE CREATION
250
200
Personal
Wealth
Creation
150
100
50
Exercise Price
Fair Market Value
Year 1
Year 2
Year 3
Year 4
Exercise Price
100
100
100
100
Fair Market Value
105
130
175
225
Organization's Value Creation
MODES UNDER ESOPs
Stock Options
Employee
Stock
Option
Scheme
(ESOS)
Employee
Stock
Purchase
Plan
(ESPP)
Restricted
Stock
Award
(RSA)
Restricted
Stock
Units
(RSUs)
Stock
Indexed
Plans
Stock
Appreciation
Rights (SARs
Phantom
Stocks
The entire ESOP Procedure:
Board Meeting
General Meeting of shareholders for
obtaining
assent
of
shareholders
in
accordance with Section 62(1)(b) of the
Companies Act, 2013
One time
Grant of options
Exercise of option by an employee
Graded
Vesting period is the time
period between the grant and
exercise of option, which can
be any time period as the
Management decides, in the
Scheme.
ROUTES UNDER ESOPs
Direct
Route
Trust
Route
DIRECT ROUTE
TRUST ROUTE
DECISIVE ASPECTS FOR FRAMING A STRATEGY FOR LEVERAGING THE CORE
VALUE OF THE BACKBONE OF ANY BUSINESS MODEL
Regulatory framework including
Tax implications from the perspective of both Employers & Employees;
Accounting implications vis--vis its impact on Companys fiscals;
Industrial Trend of rewarding Employees;
Pricing aspect to ensure win-win situation for both Employer and Employee;
REGULATORY REGIME
The Indian Laws that govern the framework of ESOPs are:
Companies Act, 2013 along with Rules;
Securities & Exchange Board of India (Share Based Employee Benefit) Regulations, 2014 for
listed companies;
Income Tax Act, 1961;
Foreign Exchange Management Act, 1999 ;
*SEBI, vide its Regulations dated 28.10.14
promulgated Securities & Exchange Board of
India (Share Based Employee Benefit)
Regulations and repealed the erstwhile ESOP
Guidelines, 1999
*Companies Act 2013, for the first time,
entailed Provisions pertaining to ESOPs
ELIGIBILITY SCENARIO UNDER SEBI (SBEB) REGULATIONS &
COMPANIES ACT, 2013
Holding Company
(Indian Company)
Employees other than
Promoters &
Independent Directors
Employees
Employees
Employees
Subsidiary
Company
(Indian Company)
Subsidiary Company
(Foreign Company)
Associate
Company
HIGHLIGHTS OF SEBI (SBEB) REGULATIONS, 2014
Any scheme set
up, funded or
controlled by any
listed company or
any of its group
company will also
be governed by
these regulations.
Stock
Appreciation
Rights have
also been
covered
under the
ambit of new
regulations.
Introduction of
new definitions
like
appreciation,
market price,
group company,
relevant date,
Secondary
Acquisition etc.
HIGHLIGHTS OF SEBI (SBEB) REGULATIONS, 2014
Market Acquisition in a
financial year shall not
exceed 2% of the paidup capital of the
company. The Trusts
shall undertake only
delivery based
transactions.
Secondary market
acquisitions by Employee
Welfare Trusts have been
allowed subject to special
resolution passed by the
Shareholders.
A minimum holding
period of six months
has been prescribed
for shares bought
from market.
HIGHLIGHTS OF SEBI (SBEB) REGULATIONS, 2014
Trustees shall not
have the power to
vote/ any right to
receive dividend on
the shares held by the
Trust.
Shareholding of the
Trust have to be
shown as Nonpromoter & non-public
shareholding, for all
disclosure purposes.
If the scheme is to
be implemented
through Trust
Route, the same
has to be decided
at the time of
taking
shareholders
approval for the
scheme.
New Definitions Introduced by SEBI (SBEB) REGULATIONS, 2014
Appreciation i.e. MP (on the date of exercise/ vesting of
SAR) -- the SAR price;
Associate Company in relation to other company,
means a company in which that other company has a
significant influence, but which is not a subsidiary
company of the company having such influence and
includes a joint venture company.
Market price means the latest available closing price on
a recognised stock exchange on which the shares of the
company are listed on the date immediately prior to the
relevant date.
New Definitions contd
General Employee Benefit Schemes (GEBS)
Any scheme in accordance with these Regulations
Dealing in shares of Company/ Listed Holing Company
Employee
Welfare
Health
Benefit
Sickness/ Accident
benefit
Scholarship
Benefits
Relevant Date means,(i). in the case of grant, the date of the meeting of the compensation
committee on which the grant is made; or
(ii). in the case of exercise, the date on which the notice of exercise is
given to the company or to the trust by the employee;
Retirement Benefit Schemes (RBS)
Any scheme in accordance with these Regulations.
Dealing in shares of Company/ Listed Holing Company
Retirement Benefits to Employees
Secondary Acquisition means acquisition of existing shares of
the company by the trust on the platform of a recognised stock
exchange for cash consideration;
Stock Appreciation Right Or SAR means 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.
Employee Welfare Trusts- Elaborative
Approach
The new ESOP Regulations aim at streamlining the regulatory
framework with regard to Employee Welfare Trusts:
Implementation of Employee Benefit Scheme through Trust route
has to be decided upfront at the time of taking shareholding
approval for the scheme;
Trust deeds are required to be filed with the Stock Exchanges;
Several Schemes can be implemented through a single Trust;
Trustees not to have the power to vote/ receive dividend on the
shares held by the Trust;
.Contd.
Secondary market acquisitions by Employee Welfare Trusts have
been allowed subject to special resolution passed by the
shareholders.
However, Trusts cannot sell these shares again in the secondary
market except in certain circumstances such as cashless exercise,
vesting/exercise of SARs or certain circumstances emergency
situations, subject to certain conditions;
Acquisition from market in a financial year shall not exceed 2% of
the paid-up capital of the Company.;
A minimum holding period of 6 months has been prescribed for the
shares bought from the market, except when the share have to be
tendered under an Open Offer/ a Buyback Offer/ a Delisting Offer;
Trust shall make disclosures & comply with SEBI (Prohibition of
Insider Trading) Regulations, 1992.
Few more newly introduced provisions.
Even Nominee Director of an institution can be given the
grants subject to certain conditions.
Repricing of unexercised part of the options is allowed
with the approval of shareholders.
New sections on SARs, GEBS & RBS have been
introduced.
Under GEBS & RBS, at no point of time, the shares
of the Company or its listed holding company shall
exceed 10% of the BV or MV or FV of total assets of
the scheme, whichever is lower.
SEBI has been empowered to relax strict compliance of
regulations either suo moto or on an application made by
the company.
HIGHLIGHTS OF COMPANIES ACT, 2013 & RULES
Approval from Shareholders via special resolution;
Permanent Employees of Company, Holding Company,
Subsidiary Company and Associate Company can be covered.
All Directors excluding Promoter Directors and Independent
Directors can be covered under the ESOP Plan
Freedom to determine Exercise Price.
Freedom to determine Lock-in period.
Explanatory statement shall disclose material details
Mandatory annual disclosures in directors report.
Minimum period of one year between grant and vesting of
options.
Options granted cannot be pledged, hypothecated or otherwise
transferred.
Register to be maintained
SCENARIO UNDER INCOME TAX ACT, 1961
In India, ESOP Taxation is a 2 layer process:
Upon Exercise of
Option
Upon Transfer of
shares obtained
under ESOPs
TAX
TREATMENT
In the hands of
Employee
At the time of Allotment:
Taxable Value= FMV on the
date of exercise of
options-Exercise Price
(TDS to be deducted by
the Employer)
At the time of transfer of
shares;
Taxable Value= Sales Price of
Shares-FMV of shares at the
time of Exercise
In the hands of
Employer
Shares issued on or after
1st April, 2009 under the
ESOP Scheme- No tax
Liability on
Employer/Company.
Areas of concern
Are the SEBI Regulations, even the Employee
Welfare & Retirement Benefit Schemes have been
covered in the ambit of ESOP Regulations and the
Promoters Employees/ Directors have been made
ineligible for the Grants, thus impacting the
Promoters rights to the benefits to be accorded
under the said Schemes.
Even for the purpose of transfer of shares to
employees, pursuant to Scheme, whether the
minimum holding period of 6 months is mandatory
for the Trust?
contd.
For the purpose of Repricing, prior shareholders
approval has been mandated for. But, the Price for
Grants in itself is not approved by the
Shareholders, so, how to have the repricing
approved by them. Furthermore, this will lead to a
delay in the entire process.
Thank You
Ms. Anjali Aggarwal
Vice President
Mob. +91 9971673336
E-Mail: [email protected]
32
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