ESOP is a step ahead to encourage, motivate and retain the existing employees in the company. Human resource is the most valuable asset for any company, which makes it important to have a idea about the incentive plans. This presentation focuses on one such area i.e. issue of ESOPs by companies in India.
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.
6. 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 )
7. 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.
8. 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.
9. 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.
10. 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)
11. 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.
12. 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
Section 2(37) of the Companies Act, 2013 defines employees’ stock option means (ESOP) as- “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.”
Clause 2(h) of SEBI Guidelines, 2014 defines "employee stock purchase scheme (ESPS)"means a scheme under which a company offers shares to employees, as part of public issue or otherwise, or through a trust where the trust may undertake secondary acquisition for the purposes of the scheme;
3. (1) A company may implement schemes either directly or by setting up an irrevocable trust(s): Provided that if the scheme is to be implemented through a trust the same has to be decided upfront at the time of taking approval of the shareholders for setting up the schemes: Provided further that if the scheme involves secondary acquisition or gift or both, then it is mandatory for the company to implement such scheme(s) through a trust(s).
Section 17(2)(iii): Perquisite now includes, the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at a concessional rate, to an individual who is or has been in the employment of that person. Provided that in a case where allotment or transfer of specified securities is made in pursuance of an option exercised by an individual, the value of the specified securities shall be taxable in the previous year in which such option is exercised by such individual.
Section 49(2B): Where the capital gain arises from the transfer of the specified security referred to in sub-clause (iiia) of clause (2) of section 17, the cost of acquisition of such specified security shall be the FMV as on the date of exercise of the option.
. The capital gains will have to be computed as the difference between the sale proceeds and FMV of the shares that was considered by the employer while computing the perquisite value including any expenditure incurred wholly in connection with the sale.
The deduction u/s 54EC will be available subject to the following conditions:-The asset transferred should be a long term capital asset and hence there should be a long term capital gain.-Such capital asset should have been transferred after 1-04-2000 by the assessee.-The assessee has within a period of 6 months after the date of such transfer has invested the capital gain in the long term specified asset.-Specified assets are the bonds redeemable after 3 years issued by National Bank for Agriculture and Rural Development (NABARD) or by the National Highways Authority of India (NHAI) or the bonds issued by Rural Electrification corporation Ltd. With effect from A.Y 2002-03 National Housing bank and SIDBI have been also included who can issue such bonds u/s 54EC.-The cost of long term specified assets which is considered for the purpose of exemption u/s 54EC, shall not be eligible for deduction with refernce to such cost u/s 80C. It means investment made in bonds u/s 54EC is not eligible for deduction u/s 80C
The perquisite value is computed as the excess of the fair-market value (FMV) of the share on the date of exercise over the exercise price. There are specific valuation rules prescribed for listed and unlisted companies to determine the FMV. The employer is required to withhold tax at source in respect of such a perquisite.