It is an option to buy the shares of the Company at a future date and at a pre-determined price.
These plans are aimed at: –
Eligibility for ESOP (Section 2(37)): –
Applicable Provisions: –
Section 62 (1)(b) and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014
Approval of shareholders: – Private Companies: To offer ESOP, approval of shareholders by way of ORDINARY RESOLUTION* is required. (*Notification dated 5th June, 2015).
Other than the Private Companies:Approval of shareholders by way of SPECIAL RESOLUTION is required.
Important provisions: –
Disclosures in the Explanatory Statement (Rule 12(2)):
Method of valuation and a statement that the Company shall comply with the applicable AS.
Disclosure in Board’s Report (Rule 12(9)):
KMPs;Any employee who receives 5% or more of options granted during that year;Employees who were granted options of more than 1% of total issued capital during any one year.
Register to be maintained in Form SH-6 (Rule 12(10)):
Listed CompaniesWhere the equity Shares of the Company are listed, the ESOP shall be issued as per the SEBI Regulations.
Accounting & Valuation of ESOP
At the time of grant of option valuation of fair value of shares shall be done by registered valuer. At the time of exercise of option valuation shall be done by Merchant banker.
Fair value of shares at the time of “grant of Option” and “exercise of option” shall be done by registered valuer as per “Guidance note on accounting for employee share-based payment” (issued 2005).
Income Tax Act, 1961 does not specify any method for computation of FMV of shares but Section 17 and Rule3(8) of the Act provides that for the purpose of perquisite valuation the FMV of ESOP shall be such value as determined by a merchant banker on the specified date.
“Specified Date” means.-the date of exercising of the option; orany date earlier than the date of the exercising of the option, not being a date which is more than 180 days earlier than the date of the exercising.
The Issuing Company can claim ESOP cost as deduction.
Income Tax Appellate Tribunal in an order by (Dy. Commissioner of Income-tax (LTU), Bangalore Vs M/s. Biocon Limited) held that “discounts under the ESOP are an employee cost and should be allowed as a deduction over the vesting period, in the hands of the issuing company.”In an ESOP, the shares are issued to the employees at a future date (after vesting period) at price lower than fair market value (FMV) of the share.
Hence ESOP discount, is nothing but the reward for services, is a taxable perquisite to the employee at the time of exercise of option, and its valuation is to be done by considering the fair market value of the shares on the date on which the option is exercised.
|Applicable provision||Concerned Person||Applicable provision||Concerned Person|
|Section 2(34)||Director||Section 149(9)||Independent Directors|
|Section 2(59)||Officers||Section 2(69)||Promoter|
|Not defined under Companies Act, 2013||Employees||Director who either himself or through his relative or through any body corporate, directly or indirectly holds more than 10% of the outstanding equity shares of the Company.|
|Directors, officers or employees of the holding or the subsidiary company.|
|Applicable Provision, if any||Particulars||Explanation|
|–||Grant||Means the issue of options to Eligible Employees (explained above).|
|–||Vest||Means the process by which the right to apply for Shares accrues to Eligible Employees against the Options Granted to them.|
|–||Exercise||Means making of an application by an employee to the Company for issue of shares against vested options.|
|Rule 12 (3)||Freedom to determine Exercise Price||Companies granting options to employees can freely determine exercise price in conformity with the applicable accounting policies, if any.|
|Rule 12(4)||Separate Resolution||Required in two cases: -i. For granting options to employees of holding or subsidiary company; or
ii. For grant of option to identified employees, during one yearequal to or exceeding 1% of the issued capital at the time of grant of options.
|Rule 12(5)(a), (b)||Variation of the terms of the scheme||· Special Resolution required
· Variation should not be prejudicial to the interests of the option holders
· Notice for passing SR shall disclose the particulars of variation and rationale thereof.
|Rule 12(6)(b)||Lock in Period||The Company has the freedom to specify the lock in period for issued shares.|
|Rule 12(6)(c)||Dividend/Voting Rights||The Employees will not enjoy the rights similar to members till the time shares are issued on exercise of option.|
|The options granted shall||ü Not be transferableü Not be pledged, hypothecated, mortgaged or otherwise encumbered
ü Be exercised only by the employee to whom the option is granted.
|Death of employee||If employee dies while in employment, all the options granted to him till date shall vest in the legal heirs or nominees of deceased employee.|
|Permanent Incapacity||If employee suffers permanent incapacity while in employment, all the options granted to him as on date shall vest in him on that day.|
|Resignation or termination of employment||All options not vested shall expire.
Employee can exercise the vested option subject to the terms of the scheme.