How to Implement ESOPs: Legal Framework and Practical Steps

 

Legal Framework (Section 62(1)(b)):

The company can issue Employee Stock Option Plans (ESOPs) under the following conditions:

1. Shareholders' Approval:

   • A Special Resolution (SR) must be passed in an Annual General Meeting (AGM) or Extraordinary General Meeting (EGM).

2. Compliance for Listed Companies:

   • ESOP issuance must comply with the Securities Exchange Board of India (SEBI) regulations.

3. Compliance for Unlisted Companies:

   • A valuation report prepared by a registered valuer is mandatory.

4. Limits on Share Value:

   • The value of shares issued under ESOP should not exceed 5% of the aggregate of the company's paid-up capital and free reserves.

Explanatory Statement (Section 102 of the Act):

The explanatory statement annexed to the notice for the general meeting must include:

1. Class of Employees:

   • Details of employees eligible for the scheme and funding for share purchase or subscription.

2. Trustees or Employees:

   • Information about trustees or employees for whom the shares are to be registered.

3. Details of Trust and Trustees:

   • Name, address, occupation, nationality of trustees, and their relationship with promoters, directors, or key managerial personnel.

4. Key Managerial Personnel Interest:

   • Interests of key managerial personnel, directors, or promoters in the scheme or trust and its effects.

5. Employee Benefits:

   • Detailed particulars of the benefits accruing to employees from the scheme.

6. Voting Rights:

   • Information on how voting rights for shares under the scheme will be exercised.

 Restrictions on Trustees:

A person cannot be a trustee of a trust created for holding shares if they:

1. Are a director, key managerial personnel (KMP), or promoter of the company, its holding, subsidiary, or associate company, or are a relative of such individuals.

2. Hold 10% or more of the paid-up share capital of the company.

Voting Rights:

If employees cannot exercise voting rights directly for the shares received during the offer period, the board must disclose:

1. Names of employees not exercising voting rights.

2. Reasons for not voting directly.

3. Names of persons exercising voting rights on their behalf.

4. Number and percentage of shares held.

5. Details of the general meeting and resolutions voted on.

6. Percentage of voting power and how votes were cast.

 Practical Steps to Issue ESOPs

1. Board Meeting:

Convene a Board Meeting to:

1. Approve the ESOP scheme.

2. Approve any required amendments to the Memorandum of Association (MOA) and Articles of Association (AOA), subject to shareholder approval in an EGM.

3. Approve the draft notice for the EGM.

4. Authorize the issuance of the EGM notice to all members.

2. Convene EGM/AGM:

Send notice of the EGM at least 21 days before the meeting date.

3. Conduct EGM:

1. Approve the ESOP scheme by passing:

   • An Ordinary Resolution for private companies.

   • A Special Resolution for public companies.

2. Approve amendments to the MOA and AOA by Special Resolution.

4. Valuation Report:

1. Obtain a valuation report from a registered valuer at the time of granting options.

2. At the time of determining fair market value for exercising options, obtain a valuation from a merchant banker.

5. Shareholder Approval:

Separate resolution approval is required for:

1. Granting options to employees of a subsidiary or holding company.

2. Granting options equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) in a year.

6. Filing with ROC:

File Form MGT-14 within 30 days of passing the Special Resolution.

7. Granting Options:

Grant options to eligible employees post-approval.

8. Vesting of Options:

1. There must be a minimum period of one year between the grant and vesting of options.

9. Exercise of Options:

1. The company determines the exercise price in line with applicable accounting policies.

2. The company may specify a lock-in period for shares issued upon option exercise.

10. Allotment of Shares:

1. After employees exercise their options, allot shares.

2. File Form PAS-3 (Return of Allotment) within 30 days of allotment.

This structured guide ensures compliance with legal requirements and facilitates the smooth implementation of ESOPs in any company.

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Article Compiled by:-

~Neel Lakhtariya

(LegalMantra.net Team)

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