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Procedure to Issue Shares through ESOP (Employees Stock Option Plan)

As per Section 62(1)(b) of the companies Act, 2013, if at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to employees under a scheme of employees’ stock option subject to a special resolution passed by company and subject to such conditions as may be prescribed.

All private, public, listed as well as unlisted companies have to follow provisions of Companies Act, 2013. This plan is commonly known as the Employee stock option plan, which benefits employees as well as companies. It increases employee ownership in the company. Many Indian subsidiaries of Foreign companies provide ESOP to its employees. The employees are provided shares of companies at discounted rates. Stock Options generally benefit Startup companies where employees are to be rewarded after the company goes public. It can be offered as Equity Compensation Plan to employees.

What are Employee Stock Options?

Employee Stock Options (ESOs) means the stock option provided to the employees, directors or officers of a company or of its holding company or a subsidiary company. Through this, the employees, directors or officers are given benefits to purchase or subscribe shares at a predetermined price at a future date. Employee Stock option Plan is a scheme where a company having a share capital proposes to increase its subscribed capital by the issue of further shares to the employees of the company at a predetermined rate.

What is the Procedure to Issue Shares through ESOP?

The law to issue stock options is governed by Section 62(1)(b) of the Companies Act 2013 and by Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. Three terms have to be looked at by the companies while considering the issue of ESOPs: granting, vesting and exercising.

• Granting:  Granting of the stock options refers to the issue of stocks to allow the employee. It also refers to the commitment that an employer makes by informing the employee of the eligibility of the available options.
• Vesting: Vesting refers to the right of the employee to apply for the shares granted to him.
• Exercise period:  Exercising refers to the actual conversion of the employee’s rights to owning the stock. The period post vesting, during which the employee can exercise the option to buy shares.
• Exercise Price: The pre-determined price at which the employee will buy the shares.

These words bound every ESOP.

Companies where procedures have been implemented for ESOP:

Procedure for Issue of ESOP in Unlisted Company and Start-Ups

1. Check the valuation of the company
2. Set up a suitable plan with relevant laws
3. Draft the ESOP Scheme
4. Conduct a board meeting and pass the scheme
5.  Call the general meeting to approve the scheme by shareholders
6. This plan has to be approved by way of Special Resolution.

There are some disclosures to be made before passing of this Resolution

• Total number of stock options to be granted
• Identifying employees who are eligible to participate in ESOPs.
• Look into the requirements of  vesting and period of vesting of the employees
• The maximum time period within which the options shall be vested
• The exercise price or ways to calculate the exercise price
• The exercise period and process of exercise
• If any Lock-in Period is there should be mentioned
• The maximum number of options to be granted per employee or the approx number
• How the options will be valued
• When options vested in employees may lapse eg. Termination due to disciplinary issues
• A statement to the effect that the company shall comply with standard accounting policies.

The Company shall obtain approval of shareholders by way of special resolution in the General Meeting in case of grant of shares to identified employees and promoters, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversion) of the company.

After approval of the ESOP Scheme by the shareholders, requisite filings about special resolution are to be done with the Ministry of Corporate Affairs “MCA”.

File form MGT-14 to submit the special resolution within 30 days of passing the resolution.

Procedure for Issue of ESOP in Private Limited Company

Section 61 of the Companies Act 2013 and Rule 12 of the Companies (Share Capital and Debenture rules 2014, enable a private limited company to Grant the ESOP to its employees subject to authorization in the article of the company. The Articles of Association (AOA) should mention how many shares will be issued in the ESOP scheme in the company. If AOA is salient regarding ESOP shares, then the article shall be amended. The Memorandum of Association (MOA) should also have an adequate share capital, and in its absence, MOA will also be amended.

Procedure for approval of ESOP scheme and to amend the memorandum and article of the company:

1. The Board of Director shall hold a meeting and decide on the following actions:

• Draft the new amended memorandum of Association (MOA) and Article of Association (AOA)
• Draft the ESOP Scheme
• Draft the resolution passed in the board meeting
• An extraordinary General Meeting should be held
• Drafting the Resolution to be passed in Extraordinary General meeting
• Drafting of notice of Extraordinary General Meeting

• Preparation of minute of the Board meeting
• Hold the meeting and discussion on the following points:
• Passing of the Resolution of amendment of AOA and MOA
• Passing the Resolution and obtaining the shareholder’s approval for ESOP Scheme
• Complete the Register filing within 30 days of the meeting
• Identifying the employees who will receive the ESOP Scheme
• Look at the vesting period as per the scheme and the option to exercise by the employee
• Payment of stamp duty on the issue of shares.

Notice of the board meeting should be given at least 7 days prior to the Extraordinary Board Meeting. However, no time limit has been set up to send notice of the Board Meeting. Private Limited Company will be converted to Public Limited Company if the shares after allotment of ESOP Scheme reach to 200. If the shareholder’s number increases the maximum number of shareholders after the allotment of the ESOP Scheme then before issuing such shares, the private limited company must be converted to a public limited company.

Procedure for Issue of ESOP in Holding Company and Subsidiary Company

Holding Company of other countries issues shares to the employees of the subsidiary company. The expenses have been reimbursed by the holding company. The ESOP by the foreign holding to the employees of the Indian Subsidiaries has been guided by the FEMA and companies Act, 2013.

Following Procedures are to be followed:

1. To get the benefit of ESOP Scheme the person must be an employee of the company
2. General permission has been granted to the person a resident of India
3. The shares under the ESOP Scheme are offered by the issuing company globally on a uniform basis
4. Register of Directors with their Shareholding is to be maintained by every Company
5. Foreign Companies are permitted to purchase the shares issued to residents in India under any ESOP Scheme provided:
6. The shares were issued in accordance with the Rules and Regulations
7. The shares are repurchased in terms of the initial offer document

For the rest of the procedures, it is similar to a Private Limited Company i.e vesting, Granting and exercise of options.

How can Enterslice help in granting of ESOPs? Our services

1. Our team of legal experts provides advises and Opinions to Companies.
2. Our team also helps in the interpretation of legal provisions and its implementation.
3. Enterslice helps in ESOP Valuations.
4. We provide Fintech support to handle the employees of the company.
5. We in Enterslice help in Planning, documentation, and drafting of ESOP Schemes.
6. We help to educate the employee on a stock action plan and guide them accordingly.

Conclusion

Companies are governed by the Companies Act, 2013, which permits the allotment of shares to employees of Company. The ESOP Should be permitted by at least 75% majority of shares. The employee can get shares of the company at a predetermined price, and in some places, these are offered in lieu of salary. This process is beneficial for both the employee and the employer of the company.

Also, Read: ESOP: A Tool to Hold on the Employees