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CH 5 - ESOP
CH 5 - ESOP
Company grants an option to its Employee to acquire Equity Shares of the company at a future date
and at predetermined price.
Owners Employees
WHY ESOPs?
Attract, Reward, Motivate and Retain Employees
Stock Appreciation
Stock Appreciation
Rights – Equity
Rights – Cash Settled
Settled
(SAR-Cash Settled)
(SAR-Equity Settled)
MAJOR TERMS TO UNDERSTAND
Grant of Exercise of
Vesting of Options Vested
Options
Options
Share price on Grant
Share price on
Rs 10
Exercise Rs 100
Shares
Direct Route
Trust Route
DIRECT ROUTE
Direct
Route
2 Exercise of options
Company Employee
3 Issue of shares
TRUST ROUTE Trust
Route
1
Grant of Loan for Payment of
4
subscription Money Employee Exercise of options
Welfare Trust
6 5
Repayment Transfer of
of Loan Shares
3 Issue of options
FAQs- TRUST ROUTE
1. Does giving loan to Trust for ESOP purpose, by a Company attracts Sec. 186 of Companies Act,
2013?
No. It is allowed under Sec. 67 of CA, 2013, only if it is given for ESOP purpose.
2. beneficially holds ten percent or more of the paid-up share capital of the company.
SEBI’s INFORMAL GUIDANCE: In the matter of Capital Trust Ltd.
- SEBI held that, since the Trustees do not have any voting rights on the Equity Shares held by an ESOP
Trust,
- Therefore, the shares held by the Trust will not be counted as part of company’s capital for the
purpose of determining the voting rights as per the SEBI (SAST) Regulations, 2011.
Of Company,
its holding &
subsidiaries +
Foreign
employees
FAQs- COVERAGE OF EMPLOYEES
1. Coverage of Group Company employees?
Performance
Designation
Opportunity Cost
REGULATORY FRAMEWORK
- Now there is no limit on %age of capital which can be issued as ESOP to foreign
employees.
- Companies need to adhere the provisions of CA, 2013/ SEBI Regulations, as the case may
be, while issuing ESOPs outside India.
- Companies falling under Approval Route need to obtain prior approval for issuing ESOPs
- Form ESOP is required to be filed with AD-Bank within 30 days of Grant of Options
- Form FC-GPR to be filed with AD-Bank within 30 days of allotment of shares
HOW TO ISSUE ESOPs?
Board Meeting
General Meeting
Grant of options
Vesting period
Unlisted Company
Listed Company
A price calculated on the basis of
Market price, one day before the date of Grant
valuation done upon Grant.
Decided Judgements:
CIT vs. Lemon tree Hotels Ltd. , August, 2015: It was decided that expense incurred by employer is allowable
& can be debited from P&L account of company.
CIT(A) vs. People Interactive India Pvt. Ltd. , October, 2015: It was decided that discount under ESOP is in the
nature of employee cost and hence is deductible during the vesting period.
COMPARATIVE ANALYSIS
Employee Stock
Employee Stock Stock Appreciation Restricted Stock
Parameters Purchase
Options Plan(ESOP) Rights(SAR) Unit(RSU)
Plan(ESPP)
Which helps best meet below objectives
Alignment with High
High Medium High
Company Goals
High
Reward Medium Medium Medium
High
Retention Medium Medium High
On Sale : Applicable
Restrictions of Contra-trade Not Applicable
On Sale : Applicable
on Designated Employee
having UPSI
Accounting Valuation: This Valuation is required for calculating Employee Compensation Cost during the
vesting period.
Perquisite Valuation: This Valuation would be conducted only in case of unlisted Companies, at the time
of Exercise of Options by the Employee to know the value of the perquisite in employee’s hands.
ESOP in a fresh allotment (excluding the secondary market acquisitions ) where payment of STT
at the time of acquisition of shares cannot be paid by the employees.
This will lead to hardships on employee as he has to pay LTCG on transfer of shares which was
earlier exempt under Section 10(38) of Income Tax Act, 1961.
ESOPs FOR START-UPs
Startups are cash-short, therefore ESOP is the best way to compensate employees
To motivate ESOPs in Startups, Government has even allowed to offer ESOPs to Promoters & Directors
holding more than 10% of the outstanding equity share capital of the company – which is otherwise not
allowed.
Even the Finance Ministry has given its nod to ESOPs in Public Sector Banks.