ESOPs Compliance Checklist and Procedure under the Companies Act, 2013

ESOPs Compliance Checklist and Procedure under the Companies Act, 2013 . Overview
ESOP stands for Employee Stock Option Plan, where the employers offer the permanent employees for the Company, the stock of the Company at a low or no additional price which can be encashed after a certain specific time period at a specific price of the stock. 
The ESOP is defined and regulated per the provisions of Section 62(1) (b) of the Companies Act, 2013 and Rule 12 of the (Share Capital and Debentures) Rules, 2014 (the “Rules”)
Exception - The below conditions laid under the Rules 12(c) are not applicable to a Start-up Company for a period of five (5) years from the day of its incorporation. 
The following are not included in the definition of an Employee and hence ESOPs cannot be issued:

an employee who is either a promoter or a person belonging to the promoter group; or

a director who either himself or through his relative or through anybody corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the Company.

Procedure to allot ESOP
1. Drafting of the ESOP Scheme.
2. Alteration of the Article of Association (AoA), if AoA is silent with respect to issue of shares to employees under the ESOP scheme.
3. Alteration of Memorandum of Association (MoA), if MoA doesn’t have adequate authorised share capital.
4. Conduct a Board Meeting (BM) of the Directors, where the actions for approval of following items shall be considered.

Approval of the ESOP scheme

Approval of the altered AoA and MoA subject to shareholders approval in  the Extraordinary General meeting (EGM) passing a special resolution

Approval of draft of notice of EGM to be held

Authorizing a person to send the communication of EGM to all the members of the Company.

5. Disclosure – The Company is required to make the following disclosures, in the explanatory statement annexed to the notice for passing of the resolution:

The total number of stock options to be granted;

identification of the classes of employees who are entitled to participate in the ESOP (Employees Stock Option Scheme);

the appraisal process for determining the eligibility of employees to the Employees Stock Option Scheme;

The requirements of the vesting and period of vesting;

The maximum time period within which the options shall be vested;

The exercise price or the formula for arriving at the same;

The exercise period and process of exercise;

The lock-in period, if any;

The maximum number of options to be granted to each employee and in aggregate;

The method which the Company shall use to value its options;

The conditions under which the option vested in employees may lapse e.g. in case of termination of employment for misconduct;

The specified time period within which the employee shall exercise the vested options in the event of a proposed termination of employment or resignation of employee; and a statement to the effect that the Company shall comply with the applicable accounting standards.

6. Conduct the EGM of the shareholders for passing the following resolution:

Issue of Employees Stock Option Scheme by the shareholders of the Company by passing an ordinary resolution.

Approving the altered MOA and AOA by the shareholders of the Company by passing a special resolution.

7. The approval of shareholders by way of separate resolution needs to be obtained by the Company in case of:

Grant of option to employees of the subsidiary or the holding Company; or

Grant of option to identified employees, during any 1 year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the Company at the time of grant of option.

8. Filing of MGT- 14 within 30 days of passing the special resolution by the shareholders of the Company.
9. Granting of options to the eligible employees* which means:
*Employee means:
– A permanent employee of the Company who has been working in India or outside India; or a director of the Company,  whether  a  whole  time  director  or  not  but  excluding  an independent director; or an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding Company of the Company,
But does not include, any employee who is a promoter or a person belonging to the promoter group; or any director who either himself or through his relative or through anybody corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the Company.
10. Vesting period, which means the minimum period of 1 year between the grant of options and vesting of option and the option granted to employees is not transferable to any other person.
11. Exercising power given to the employees of the Company also, the Company has the freedom to mention the lock-in period for the issued shares per ESOP scheme.
12. Allotment of shares, after the approval of the ESOP scheme by the shareholders, the grant option is available to the eligible employees and allotment is done. The return of allotment is filed in e-form PAS-3 with ROC within 30 days of allotment of the shares.
Note:

The option granted to employees is not transferable to any other person, nor shall not be pledged, hypothecated, mortgaged or otherwise encumbered or alienated in any other manner.

In the event of sudden death of an employee while he/she is in employment, all the options granted to till such date shall vest in the legal heirs or the nominees of the deceased employee.

In the event of termination or resignation from employment, all the options not vested in the employee as on that day shall expire.

However, the employee can exercise the options granted to them which are vested within the period specified in this behalf, subject to the terms and conditions under the scheme granting such options as approved by the Board of directors of the Company.

The Board of directors of the Company, shall, inter alia, disclose in the Directors’ Report for the year the following details such as (i) the options granted, vested, exercised and lapsed, (ii) the total number of shares arising as a result of exercise of options (iii) the exercise price, (iv) variation of terms of options, (v) money realized by exercise of the options, (vi) total number of the options which are in force, and (vii) employee wise details of options granted to the KMP (Key Managerial Personnel), any other employees and identified employees.

Post Compliances
In addition to the above requirements, the Company is required to comply with the following compliances as per Rule 12 (10) of the Rules:
(a) Maintaining a Register of ESO (Employee Stock Options) in Form No. SH.6 and shall enter the particulars of option granted under Section 62 (1) (b) of the Act.
(b) The Register of ESO (Employee Stock Options) shall be maintained at the registered office of the Company or any other such place as decided and agreed by the Board of directors of the Company.
(c) The entries in the register shall be authenticated by the Company secretary of the Company or by any other person authorized by the Board of directors for this purpose.

Overview

ESOP stands for Employee Stock Option Plan, where the employers offer the permanent employees for the Company, the stock of the Company at a low or no additional price which can be encashed after a certain specific time period at a specific price of the stock.

The ESOP is defined and regulated per the provisions of Section 62(1) (b) of the Companies Act, 2013 and Rule 12 of the (Share Capital and Debentures) Rules, 2014 (the “Rules”)

Exception - The below conditions laid under the Rules 12(c) are not applicable to a Start-up Company for a period of five (5) years from the day of its incorporation.

The following are not included in the definition of an Employee and hence ESOPs cannot be issued:

an employee who is either a promoter or a person belonging to the promoter group; or
a director who either himself or through his relative or through anybody corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the Company.

Procedure to allot ESOP

1. Drafting of the ESOP Scheme.

2. Alteration of the Article of Association (AoA), if AoA is silent with respect to issue of shares to employees under the ESOP scheme.

3. Alteration of Memorandum of Association (MoA), if MoA doesn’t have adequate authorised share capital.

4. Conduct a Board Meeting (BM) of the Directors, where the actions for approval of following items shall be considered.

Approval of the ESOP scheme
Approval of the altered AoA and MoA subject to shareholders approval in the Extraordinary General meeting (EGM) passing a special resolution
Approval of draft of notice of EGM to be held
Authorizing a person to send the communication of EGM to all the members of the Company.

5. Disclosure – The Company is required to make the following disclosures, in the explanatory statement annexed to the notice for passing of the resolution:

The total number of stock options to be granted;
identification of the classes of employees who are entitled to participate in the ESOP (Employees Stock Option Scheme);
the appraisal process for determining the eligibility of employees to the Employees Stock Option Scheme;

The requirements of the vesting and period of vesting;
The maximum time period within which the options shall be vested;
The exercise price or the formula for arriving at the same;
The exercise period and process of exercise;
The lock-in period, if any;
The maximum number of options to be granted to each employee and in aggregate;
The method which the Company shall use to value its options;
The conditions under which the option vested in employees may lapse e.g. in case of termination of employment for misconduct;
The specified time period within which the employee shall exercise the vested options in the event of a proposed termination of employment or resignation of employee; and a statement to the effect that the Company shall comply with the applicable accounting standards.

6. Conduct the EGM of the shareholders for passing the following resolution:

Issue of Employees Stock Option Scheme by the shareholders of the Company by passing an ordinary resolution.
Approving the altered MOA and AOA by the shareholders of the Company by passing a special resolution.

7. The approval of shareholders by way of separate resolution needs to be obtained by the Company in case of:

Grant of option to employees of the subsidiary or the holding Company; or
Grant of option to identified employees, during any 1 year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the Company at the time of grant of option.

8. Filing of MGT- 14 within 30 days of passing the special resolution by the shareholders of the Company.

9. Granting of options to the eligible employees* which means:

*Employee means:

– A permanent employee of the Company who has been working in India or outside India; or a director of the Company, whether a whole time director or not but excluding an independent director; or an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding Company of the Company,

But does not include, any employee who is a promoter or a person belonging to the promoter group; or any director who either himself or through his relative or through anybody corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the Company.

10. Vesting period, which means the minimum period of 1 year between the grant of options and vesting of option and the option granted to employees is not transferable to any other person.

11. Exercising power given to the employees of the Company also, the Company has the freedom to mention the lock-in period for the issued shares per ESOP scheme.

12. Allotment of shares, after the approval of the ESOP scheme by the shareholders, the grant option is available to the eligible employees and allotment is done. The return of allotment is filed in e-form PAS-3 with ROC within 30 days of allotment of the shares.

Note:

The option granted to employees is not transferable to any other person, nor shall not be pledged, hypothecated, mortgaged or otherwise encumbered or alienated in any other manner.

In the event of sudden death of an employee while he/she is in employment, all the options granted to till such date shall vest in the legal heirs or the nominees of the deceased employee.

In the event of termination or resignation from employment, all the options not vested in the employee as on that day shall expire.

The Board of directors of the Company, shall, inter alia, disclose in the Directors’ Report for the year the following details such as (i) the options granted, vested, exercised and lapsed, (ii) the total number of shares arising as a result of exercise of options (iii) the exercise price, (iv) variation of terms of options, (v) money realized by exercise of the options, (vi) total number of the options which are in force, and (vii) employee wise details of options granted to the KMP (Key Managerial Personnel), any other employees and identified employees.

Post Compliances

In addition to the above requirements, the Company is required to comply with the following compliances as per Rule 12 (10) of the Rules:

(a) Maintaining a Register of ESO (Employee Stock Options) in Form No. SH.6 and shall enter the particulars of option granted under Section 62 (1) (b) of the Act.

(b) The Register of ESO (Employee Stock Options) shall be maintained at the registered office of the Company or any other such place as decided and agreed by the Board of directors of the Company.

(c) The entries in the register shall be authenticated by the Company secretary of the Company or by any other person authorized by the Board of directors for this purpose.

ESOPs Compliance Checklist and Procedure under the Companies Act, 2013

Overview

Procedure to allot ESOP

*Employee means:

Note:

Post Compliances

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