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Procedure for issuing ESOP

Procedure for issuing ESOP

 Employee Stock Option Plan is an employee benefit plan where the company encourages employee ownership in the company. The company’s shares are given to the employee at discounted rates. Under the provisions of the Companies Act,2013  and Companies ( Share Capital and Debentures) Rules, 2014 any company can issue ESOP. In the case of listed companies, they are to be issued by SEBI.

 ESOP is a scheme where the company proposes to increase the subscribed share capital after issuing the further shares to the employees at pre-determined rates. Employee Stock Option Plan benefits the company as well as their employees.

Who are eligible for ESOPs?

Rule 12 (1) of the Companies(Share Capital and Debentures) Rules, 2014 states that the following employees are eligible for ESOPs:

  • A permanent employee of the company who is working in the country or outside the country.
  • A director of the company, which includes the part-time director
  • A permanent employee or director of a subsidiary company in India or Outside India or Holding company or an associate company

The following employees are not eligible for ESOP

  • An employee who belongs to the promoter group or is a promoter of the company
  • A director who holds more than ten percent of the equity shares whether directly or indirectly.
  • It is not applicable for the startup companies for ten years from incorporation

Procedure to Issue ESOP

Section 62(1) (b)  of the Companies Act,2013 and Rule 12 of Companies Rules 2014 governs the issuing of the ESOP. The procedure to issue the ESOP under these rules is similar to the procedure under  SEBI Employee Stock Option Scheme Guidelines for listed companies.

  1. A draft needs to be prepared of the ESOP according to the companies,2013 and Rules.
  2. A board meeting notice along with the draft resolution that is to be passed in the board meeting is to be made.
  3. The notice of the board meeting is to be sent seven days before the meeting to all the directors.
  4. A resolution is to be passed for the issuance of shares through the ESOP, the prices of the shares to be issued to the pursuant are to be determined. The date, time is to be fixed for calling the general meeting for issuing ESOP.
  5. The draft minutes of the board meeting are to be sent to all the Directors within fifteen days of conclusion and MGT 14 is to be filed with the ROC for passing the resolution.
  6. The notice of the general meeting is to be sent to all the Directors, auditors, shareholders, and the secretarial auditors of the company at least before twenty-one days before the meeting.
  7. Pass the special resolution for issuing the shares under the ESOP to the employees, directors, and officers of the company in the general meeting.
  8. Form MGT 14 is to be filed with the ROC within 30 days of passing the resolution in the general meeting with the documents
  9. Send options to the employees, the directors, and officers of the company for purchasing the shares under Employee stock options company.
  10. Maintain a “Register of Employee Stock Options” in Form No. SH-6 and enter the particulars of the ESOP that are granted to the employees, directors, or the officers of the company.
  11. If the Private Company is wanting to issue the ESOP then it should ensure that the AOA authorizes the issuing of shares through ESOP. In case if the AOA does not authorize then the company is required to hold a general meeting and alter the AOA to include the provision of issuance of shares.

What is to be disclosed while issuing ESOP?

The company while issuing the ESOPs is required to make the following disclosures in the explanatory statement that is annexed to the notice for passing a special resolution of the ESOP.

  • The total number of stock options that are to be granted
  • The identified class of employees who can participate in the ESOP.
  • Requirements of vesting period of the ESOP.
  • The maximum period within which the options can be vested
  • The price to be exercised and process of exercise
  • Lock-in period if any,
  • The grant of the maximum number of options for the employee
  • The method that is to be used by the company to value the options
  • The conditions of the lapsing of the options that are vested in employees
  • A statement that the company will comply with the applicable accounting standards.