Procedure for Issuing Employee Stock Option Plan (ESOP)

An Employee Stock Option Plan (ESOP) is an advantageous employee benefit that promotes company ownership among employees. By giving employees the opportunity to purchase company shares at discounted rates, ESOPs seek to align the interests of employees and shareholders. As per the Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014, any company can issue ESOPs. For listed companies, these must comply with guidelines issued by SEBI.

The ESOP scheme enhances company engagement by increasing the subscribed share capital through discounted shares issued to employees. This not only benefits the employees but also the company.

Eligibility for ESOPs

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

A permanent employee working in or outside the country.
A director of the company, including part-time directors.
Employees or directors of a subsidiary, holding, or associate company, whether in India or abroad.

However, ESOPs are not available for:

Employees who are part of the promoter group or are promoters.
Directors holding more than ten percent of equity shares, directly or indirectly.
Startup companies for ten years from incorporation.

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Procedure to Issue ESOP

The process of issuing an ESOP is governed by Section 62(1)(b) of the Companies Act, 2013, and Rule 12 of the Companies Rules, 2014. The procedure aligns closely with SEBI guidelines for listed companies:

Prepare a draft ESOP in compliance with the Companies Act, 2013.
Create a board meeting notice with a draft resolution for the ESOP.
Send the board meeting notice to all directors seven days in advance.
Pass a resolution to issue shares through the ESOP, determine share prices, and schedule a general meeting.
Send draft board meeting minutes to all directors within fifteen days; file MGT-14 with ROC.
Send a general meeting notice to directors, auditors, and shareholders twenty-one days in advance.
Pass a special resolution in the general meeting to issue shares under the ESOP.
File Form MGT-14 with ROC, with necessary documents, within 30 days of resolution passage.
Issue stock options to employees and directors under ESOP terms.
Maintain a "Register of Employee Stock Options" in Form No. SH-6.
Ensure AOA authorizes ESOP issuance; otherwise, amend AOA in a general meeting.

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Key Disclosures When Issuing ESOP

Companies must make the following disclosures when issuing ESOPs, detailed in the explanatory statement of the special resolution notice:

Total number of stock options to be granted.
Classes of employees eligible for ESOP participation.
Vesting period requirements.
Maximum vesting period.
Exercise price and process.
Any lock-in periods.
Maximum options available per employee.
Method for option valuation.
Conditions for lapsing vested options.
Compliance statement with accounting standards.

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Given the complexity, companies should also review general compliance requirements for seamless ESOP implementation.

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Frequently Asked Questions

Common questions about ESOP Issuance Procedure.

An Employee Stock Option Plan (ESOP) is an employee benefit plan where the company encourages employee ownership by offering company shares to employees at discounted rates. It aims to increase the subscribed share capital by issuing further shares to employees at pre-determined rates.

According to Rule 12(1) of the Companies (Share Capital and Debentures) Rules, 2014, permanent employees of the company (whether working in India or abroad), directors (including part-time directors), and permanent employees or directors of subsidiary, holding, or associate companies are eligible for ESOPs. However, employees belonging to the promoter group, promoters, and directors holding more than 10% equity shares (directly or indirectly) are not eligible.

The procedure for issuing ESOPs involves preparing a draft ESOP scheme, passing board and shareholder resolutions, filing necessary forms with the Registrar of Companies (ROC), sending option letters to eligible employees, and maintaining a register of employee stock options.

While issuing ESOPs, the company must disclose the total number of stock options to be granted, the class of eligible employees, vesting period requirements, maximum vesting period, exercise price and process, lock-in period (if any), maximum options per employee, option valuation method, lapsing conditions, and compliance with applicable accounting standards.

No, employees belonging to the promoter group or promoters, and directors holding more than 10% of the company's equity shares (directly or indirectly), are not eligible for ESOPs.

Yes, if the Articles of Association (AOA) of a private company do not authorize the issuance of shares through ESOPs, the company must hold a general meeting and alter the AOA to include a provision for issuing shares under an ESOP scheme.

Companies are required to maintain a "Register of Employee Stock Options" in Form No. SH-6 to record the particulars of the ESOPs granted to employees, directors, or officers of the company.

Yes, the ineligibility criteria for promoters and directors holding more than 10% equity shares do not apply to startup companies for the first ten years from their incorporation.

The procedure for issuing ESOPs is similar for listed and unlisted companies under the Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014. However, listed companies must additionally comply with SEBI's Employee Stock Option Scheme Guidelines.

Yes, a company can issue ESOPs to permanent employees or directors of its subsidiary, holding, or associate companies in India or outside India.