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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.
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.
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.
These words bound every ESOP.
Companies where procedures have been implemented for ESOP:
There are some disclosures to be made before passing of this Resolution
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.
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:
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.
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:
For the rest of the procedures, it is similar to a Private Limited Company i.e vesting, Granting and exercise of options.
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