Home » Companies Act » Employee stock options under the new corporate law regime

Employee stock options under the new corporate law regime

Enter your email address to follow this blog and receive notifications of new posts by email.

Join 371 other followers

Tags

Twitter Feed

Introduction

Employee stock options are popular instruments used by companies for rewarding employees since rewards earned by employees pursuant to exercise of these options are linked to the performance and growth of the company.  As opposed to the Companies Act, 2013 (“New Act“), the Companies Act, 1956 (“Old Act“) did not regulate issue of employee stock options.  Now, pursuant to section 62 (1) of the New Acteffective since 1 April 2014, issue of employee stock options by a company will require passing of a special resolution by shareholders in a general meeting.  Further, Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 (“Share Capital and Debentures Rules“) effective since 1 April 2014, and framed pursuant to section 62 (1) read with section 469 of the New Act, prescribes additional conditions which will need to be satisfied by private companies and unlisted public companies.  However, additional conditions for issue of employee stock options by listed companies were and will continue to be regulated by the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 (“ESOS Guidelines“).

Definition of ’employees’ stock option’ under the New Act

The New Act defines employees’ stock options as an option given to directors, officers or other employees of a company, its holding or subsidiary company pursuant to which such persons are provided the benefit or right to subscribe to or purchase the company’s shares at a pre-determined price.  Further, pursuant to Share Capital and Debentures Rules, the term ‘employee’ includes permanent employees of the company and directors or employees of its subsidiary, holding or associate company.  However, the term ‘employee’ excludes promoters, independent directors, and all directors who directly or indirectly, through a relative or body corporate, hold more than ten percent of the equity share capital of the company.  Therefore, pursuant to the Act, employee stock options cannot be issued to above mentioned excluded persons.  These exclusions are also applicable to listed companies pursuant to the ESOS Guidelines and Circular No. CIR/CFD/POLICY CELL/2/2014 dated 17 April 2014 issued by the Securities and Exchange Board of India.

Conditions for issue of employees’ stock options

The Share Capital and Debentures Rules prescribe one year as the minimum vesting period for employee stock options. However, the company will be free to determine the exercise price and lock-in period on shares issued pursuant to exercise of the option. While employee stock options must not be subject to any encumbrance and are non-transferable, they can be inherited. Additionally, in case of permanent incapacity during the employment, all options granted to the employee as on the date of incurring such incapacity will stand vested.  On the other hand, in case of resignation or termination all unvested options will expire and vested options may be exercised by the employee in accordance with the terms and conditions of the employee stock option scheme.

Variation in terms of employees’ stock option scheme

Pursuant to the Share Capital and Debentures Rules, a company may vary the terms of any existing employee stock option scheme which has not been exercised by employees by way of a special resolution only if such variation is not prejudicial to the option holders. The notice for calling a meeting to vary such existing employee stock option scheme must state the variation, reason for such variation and the details of employees who are beneficiaries of such variation.

Compliance requirements

Additionally, from a compliance perspective, a company proposing to issue employee stock options is required to make certain disclosures in the explanatory statement at the time of calling the shareholders meeting for authorising the issuance of employee stock options.  Among others, these disclosures include the number of employee stock options, cap on employee stock options per employee and in aggregate, eligibility criteria, vesting conditions, exercise price or formula for determining the exercise price, lock-in period, method to be used by company to value its options, conditions for lapse of employee stock options and statement to the effect that the company will comply with applicable accounting standards.  Further, shareholders’ approval will be required by way of a separate resolution where the options are granted to employees of its subsidiary or holding company or to identified employees for at least one percent of the issued share capital, not including warrants and conversions, during one year.

Additionally, the company is required to maintain a register of employee stock options in Form No. SH.6 specified under the Share Capital and Debentures Rules.  Further, the director’s report must specify the details of the employee stock option scheme including the options granted, options vested, options exercised, shares resulting from exercise of options, options lapsed, exercise price, variation in terms, amounts realised pursuant to exercise of options and options in force, employee wise details of options granted to key managerial personnel and employees who have received at least five percent of options granted in that year and identified employees who have been granted options equal to at least one percent of the issued share capital, not including warrants and conversions, during one year.

Conclusion

While the New Act seeks to regulate the issue of employee stock options by private and unlisted public companies, other than prescribing a minimum vesting period of one year, there appear to be no significant restrictions on issue of employee stock options. Additionally, listed companies will continue to be regulated by the ESOS Guidelines and therefore the issue of employee stock options by such companies remains unaffected by the New Act.

Saumya Sharma

saumya.sharma@pxvlaw.com

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: