Published on June 9, 2016
1. EMPLOYEE STOCK OPTION PLAN “ A win- win situation for both- Employer and Employee” BY Abhilasha Kumari College of Legal Studies, UPES B.B.A. LL.B. (Hons.)
2. What are ESOP’s •Section 2(37) of the Companies Act, 2013 defines ESOP. •In ESOP the company grants an option to its employees to acquire shares at a future date at a pre-determined price. •These are not transferable-Clause 9 of SEBI (SHARE BASED EMPLOYEE BENEFITS) REGULATIONS, 2014 •The options cannot be pledged, hypothecated, mortgaged or otherwise alienated in any respect. Rule 12(8)(b) of Companies (Share Capital and Debentures) Rules, 2014)
3. ELIGIBILITY TO PARTICIPATE IN ESOS •An employee •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. (SEBI (Share Based Employee Benefit) Regulations, 2014)
4. Employee Stock Purchase Plan •ESPS is generally used in listed companies, wherein the employees are given the right to acquire shares of the company immediately, not at a future date as in ESOS. •Clause 2(h) of SEBI Guidelines, 2014 defines "employee stock purchase scheme (ESPS)“. •Employees contribute to the plan through payroll deductions, which build up between the offering date and the purchase date.
5. Routes under ESOP 1. Direct Issue of ESOP’s • Rule 12 read with section 62(1) (b); ( Refer Memo) 2. Creation of Trust •Rule 16 read with section 67. (Refer Memo) •Indian Trust Act, 1881. •Clause 3 of SEBI (SEBI (SHARE BASED EMPLOYEE BENEFITS) REGULATIONS, 2014 )
6. Framework governing ESOP 1. Companies Act, 2013 •Sec 2(37)- Definition of ESOP •Sec 62 (1)(b)- corporate restructuring by ESOP 2. Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, 3. Income Tax Act, 1961 •clause (iii) of sub-section (2) of section 17 •Section 49(2B) 4. Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014.
7. Highlights of Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, •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. •Mandatory annual disclosures in Directors Report.
8. Contd. •Minimum period of one year between grant and vesting of options •In case of death, all options granted shall vest in the legal heirs. -Rule 12(8) (d) . •In case of resignation, all unvested options shall lapse.- Rule 12(8) (f). •Register to be maintained as per format prescribed by ROC.
9. Tax treatment •When the employee sells the shares subsequently, the gains will be taxed as capital gains. (see note below). •The capital gains tax implications would depend upon the period of holding of shares from the allotment date and whether security transaction tax (STT) has been paid. •The section 54EC of the Income-tax Act, 1961 allows a deduction in respect of LTCG arising from sell/transfer of any long term capital asset . (see note)
10. Contd. •ESOP benefits form a part of the employee’s salary income and are taxable as a perquisite. (see note below). – CBDT circular No 710. •However, For A.Y.2001-02 and subsequent year(s), the Law stands modified and such benefit(s) are not to be taxed as perquisites. Mere grant of stock options or even exercise of such stock options whereby shares are in fact allotted does not attract tax as perquisite(s). They are to be taxed only once when sold, as capital gains.
11. SEBI Guidelines •Promoters and the part- time directors will not be entitled to receive the securities under the ESOPs even if the promoter(s) is/are employee(s) of the company. •The issue of shares/convertible instruments under an ESOP shall not exceed 5% of the paid-up capital of the company in any one year. •Clause 4 of the guidelines on preferential issues providing for pricing shall be also applicable to the ESOPs. •A company introducing ESOPs shall submit a certificate to the concerned stock exchange at the time of the listing of the securities. •If the exercise-price is at a discount to the market price, the discount will be treated as a cost. •A minimum lock-in period of 1 year from the date of
12. THANK YOU !!!
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