It explains the basic concept of how employee stock option plan works and gives a brief about the rules governing the issuance of the same as mentioned under the Companies Act, 2013. It also mentions the rules in place which govern the issuance of employee stock option plan by a foreign company to its employees resident in India. It also explains two case studies about the issuance of ESOP by Flipkart and redbus and how sometimes employees might be cheated in the name of ESOP.

1. Employee Stock Option

2. What is Employee Stock Option?
According to Section 2(37) of the Companies Act, 2013
“The option given to the directors, officers or employees of a
company or of its holding company or subsidiary company or
companies, if any, which gives such directors, officers or employees,
the benefit or right to purchase, or to subscribe for, the shares of
the company at a future date at a pre-determined price”

3. Russell B. Long
 "Bring on those tired, labor-
plagued, competition-weary
companies and ESOP will breathe
new life into them. They will find
ESOP better than Geritol. It will
revitalize what is wrong with
capitalism. It will increase
productivity. It will improve labor
relations. It will promote
economic justice. It will save the
economic system. It will make our
form of government and our
concept of freedom prevail over
those who don't agree with us."

4. Overview
Companies (Share
Capital and
Debenture) Rules,
2014
SEBI (Share Based
Employee
Benefits)
Regulations, 2014
Companies Act,
2013

5. Bifurcation
Companies (Share Capital
and Debenture) Rules, 2014
Issue of ESOPs
(Common for Pvt. Comp. &
unlisted comp.)
Rule 12
Trust set-up for
administration of ESOPs
(Provisions are specifically
for unlisted public comp.)
Rule 16

6. Basic Concept
Grant
• Cliff
Period
• Vesting
Period
Vesting • Exercise
Period
Exercise • Lock-in
Period
Sale

7. Eligibility of employees
• This definition flows from Rule 12 (1) of Companies (Share Capital and
Debentures) Rules, 2014.
• A permanent employee of the company who has been working in India or
outside India
• A director of the company, whether a whole time director or not but
excluding an independent director
• Any of the employees mentioned above of a subsidiary, in India or outside
India or of a holding company of the company
• But does not include-
• An employee who is a promoter or a person belonging to the promoter group
• A director who either himself or through his relative or any body corporate,
directly or indirectly, holds more than ten percent of the outstanding equity
shares of the company
• Curious case of start-ups

8. Case of Start-ups
 An entity shall be considered to be a start-up
 Up to five years from the date of its incorporation/registration
 If its turnover for any of the financial years has not exceeded Rupees 25 crore
 It is working towards innovation, development, deployment or
commercialization of new products, processes or services driven by
technology or intellectual property;
 Exemption for 5 years

9. Disclosures & Approval of shareholders
1. Disclosures (explanatory statement)
 The total number of stock options to be granted;
 Identification of classes of employees entitled to participate in the Employee
Stock Option Scheme;
 The requirements of vesting and period of vesting; (Vesting schedule)
 Lock-in period & exercise price
 Resignation & Termination (Vested & Not vested)
 The method which the company shall use to value its options
2. Approval of shareholders is mandatory for the ESOS by way of special
resolution.
 Separate approval of shareholders shall be obtained in case of-
 (a) grant of option to employees of subsidiary or holding company; or
 (b) grant of option to identified employees, during one year, equal to or
exceeding one per cent of the issued capital

10. Other Important Information
 There shall be a minimum period of one year between the grant of options
and the vesting of option;
 The company shall have the freedom to specify the lock-in period for the
shares;
 The option granted to the employee shall not be transferable to any person;

11. ESOP Valuation
 Valuation is important for calculating employee compensation cost which
forms part of the company’s financial statement.
 There are two methods for calculating it. (Intrinsic & Time Value)
 Management decides the exercise price
 Black Scholes method (Time Value method)
 (a) Total life of the option- It is not the total life but the likely life of the
option.
 (b) Volatility in the stock prices
 (c) Exercise price of the option
 Determination of the exercise price as well as the process of valuation of the
shares involves adherence to specific accounting policies set out by the ICAI.
(Institute of Chartered Accountants of India)

12. Who cannot be trustees
Director/Key
Managerial
Personnel/
promoter or
their relative
Company
Holding
Company
Subsidiary
Company
Associate
Company
A person who holds 10% or more
paid up capital in the company

13. FEMA Regulations
Bifurcation
Transfer or issue of any
security by a person
resident outside India
S. 6(3)(b)
Transfer or issue of any
foreign security by a
person resident in India
6(3)(a)

14. Foreign Exchange Management (Transfer or
Issue of Security by a Person Resident Outside
India) Regulations, 2017 read with Foreign
Direct Investment Policy, 2017 [6(3)(b)]
 An Indian company may issue ESOPs to its employees or directors, and they
may belong to its-
 (a) holding company
 (b) joint venture undertaken by the company
 (c) wholly owned overseas subsidiary/subsidiaries
 But it is mandatory for them to comply with the SEBI regulations or the
Companies (Share and Debenture) Rules as applicable. Further, they also have
to be within the sectoral cap of the sector.
 Government approval is needed in case the investment relates to the
approval route and if the ESOP is being issued to a citizen of Bangladesh or
Pakistan.
 Form ESOP
Resident outside India

15. Acquisition of foreign shares (FEMA 120 r/w
FED Master Direction No. 15/2015-16
[6(3)(a)]
 Foreign Exchange Management (Transfer or Issue of any Foreign Security)
Regulations, 2004. Notification No. FEMA 120/2004-RB, dated 7-7-2004
 Issued by a company incorporated outside India under Cashless Employees Stock
Option (No remittance)
 (a) Category 1- Employee or director of an Indian office or branch of a foreign
entity.
 (b) Category 2- Employee or director of a subsidiary in India of a foreign entity.
 (c) Category 3- Employee or director of an Indian company in which a foreign
entity has a direct or indirect equity holding.
 The shares offered under the ESOP Scheme must be offered globally and on a
uniform basis by the foreign entity.
 Further, it is also mandatory for the Indian company to submit an Annual Return to
the Reserve Bank through the Authorized Dealer bank giving details of
remittances/beneficiaries etc.
 Whatever proceeds are gained out of sale of such shares are to be repatriated.

16. REDBUS
 redBus was acquired by the IBIBO group which is a subsidiary of the Naspers
Ltd for 135$ million. (Year 2013)
 Around 22 employees had ESOPs.
 Sama and other three executives benefitted from the deal as they made a lot
of money out of it.
 But Alok Goel and other employees who had ESOPs did not have an
accelerated vesting clause in their agreement due to which they could not
cash on the acquisition deal.

17. FLIPKART
 Walmart bought a majority holding in Flipkart by investing $16-billion.
Flipkart then announced that it will repurchase 50% of the vested ESOPs.
 The employees were able to liquidate their share holdings at $126-128 per
unit.
 Ex-employees will be eligible to sell only 30% of the vested options.
 The employees who were currently working with flipkart had the option of
liquidating their shareholdings in three phases. (50%, 25%, 25%)
 Flipkart offers stock options to its employees at the grade of assistant
managers and above and they generally have a four year vesting schedule.

18. Thank You