ESOP process flow: An overview

Prabhat Nigam

23 May, 2022

With a view to incentivise employees to work better for the company and also to retain the best performing employees of the company, the companies are nowadays issuing Employee Stock Option Plan (ESOP) to encourage a sense of ownership among the employees. Any company can issue ESOPS. Except for the listed companies, all those companies who wish to issue ESOPs can do so in accordance with the applicable provisions of Companies (Share Capital and Debentures) Rules, 2014 and the Companies Act, 2013. In case of public listed companies, compliance with the SEBI ESOP guidelines is a must. This piece of writing discusses the meaning of ESOP process flow and the process of Issue of ESOP.        

What is ESOP process flow? 

The process of issuance of ESOPs to the eligible employees of the company is known as ESOP process flow. The applicable legislations, rules and procedures that a company follows in vesting ESOPs to its eligible employees is called as ESOP process flow. In India, ESOP process flow is governed by the Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 and Section 62(1)(b) of the Companies Act, 2013^[1].    

ESOP process flow/ Process of issue of ESOP 

Except for the listed companies, all the companies who wish to issue ESOPs have to do so in accordance with the Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 and Section 62(1)(b) of the Companies Act, 2013. In case of listed companies, the procedure laid down in the SEBI ESOP Guidelines need to be followed. The ESOP process flow is as follows:

1. Preparation of ESOP draft: The Company’s board appointed committee shall draft an ESOP in consonance with the applicable provisions of the Companies Act and rules.

• Preparation for Board Meeting: A notice has to be prepared for a board meeting and the draft resolution also needs to be prepared to be passed in the board meeting.

• Sending notice to the directors: The notice of the board meeting must be sent to all the directors of the company at least 7 days before the meeting.  

• Pass special resolution at a General meeting: The resolution needs to be passed for the issuance of ESOP. Followed by this, prices of the shares need to be determined which will be issued pursuant to ESOP. A specific time and date needs to be fixed and approval for calling a general meeting also needs to be obtained to pass a special resolution for issuing of ESOP.

• Filing of form MGT-14 with ROC: A draft of minutes of the board meeting has to be sent to all the directors within 15 days of conclusion of the board meeting and MGT-14 form also needs to be filed with the Registrar of Companies for passing of the board resolution.

• Notice to directors, shareholders, auditors: A notice of the general meeting must be sent to all the directors, auditors, secretarial auditors, shareholders of the company at least twenty days before the meeting.

• Passing special resolution at the General meeting: The special resolution should be passed at the General meeting for the issuance of shares under ESOP scheme to the eligible employees, directors and officers of the company.

• Filing MGT-14 with ROC: Form MGT-14 must be filed with the Registrar of Companies within a period of 30 days of passing special resolution in the general meeting along with the required documents.

• Sending of options: The employees, officers and directors of the company must be sent the options to make purchase of the shares under ESOP scheme.

1. Maintaining a register of ESOP: A ‘Register of Employee Stock Options’ needs to be maintained in Form No. SH-6 and the particulars of the ESOP granted to the employees, officers and directors of the company need to be entered in that register.

In case a private company wishes to issue ESOP, then such company needs to ensure that their Articles of Association (AoA) authorises the company to issue shares through ESOPs. If the AoA of the company do not authorise issuance of shares through ESOP, then such company should first hold an EGM to alter the AoA to include the provisions of issuance of shares through ESOP. Then the company should proceed with holding a board meeting to pass the resolution and get the approval of the shareholders for the ESOP scheme.

ESOP Process flow for the public listed companies

The process begins with conducting a board meeting where a ‘Compensation Committee’ is constituted to draft ESOP scheme according to the law. Thereafter, approval is taken for the draft ESOP scheme at the board meeting and notice of General Meeting is given to the shareholders. A copy of the ESOP scheme is sent to the Stock Exchange as per the Listing Agreement. A notice is sent for General Meeting and approval for the ESOP scheme is taken from the shareholders via special resolution. Stock Exchange is then provided with a copy of the proceedings at the General meeting. With the special resolution all the required forms are submitted to the ROC. The ESOP scheme is announced at the meeting of Compensation Committee and Board and undertaking is obtained from the concerned employee as per SEBI regulations. The scheme is then filed with SEBI and Chief Commissioner of Income Tax to make it qualified ESOP.

Finally, listing is done with the Stock Exchange. It must be remembered that the Stock Exchange has to be notified as per schedule V before exercising the option of and take Stock Exchange’s in principle approval and as and when ESOP scheme is exercised, notification has to be sent to the Stock Exchange under Sch. VI.

Final Compliances  

The Register of Employee Stock Option Scheme shall be maintained at the registered office of the company or at any other place as the board of directors of the company may decide.

The entries in the register will be authenticated by the CS of the company or by any other person who has been entrusted to do the job by the board of directors for this purpose.     

Read our Article:Procedure to Issue Shares through ESOP (Employees Stock Option Plan)