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Chapter: Business Science - Merchant Banking and Financial Services - Issue Management Introduction

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Stock Option of Employees Stock Option Scheme (ESOP)

A method of marketing the securities of a company whereby its employees are encouraged to take up shares and subscribe t scheme on the encouraged to take up shares and subscribe to it is known as 'stock option'.. It is a voluntary scheme on the part of the company to encourage employees‘ participation in the company.

STOCK OPTION OF EMPLOYEES STOCK OPTION SCHEME (ESOP)

 

A method of marketing the securities of a company whereby its employees are encouraged to take up shares and subscribe t scheme on the encouraged to take up shares and subscribe to it is known as 'stock option'.. It is a voluntary scheme on the part of the company to encourage employees‘ participation in the company. The scheme is particularly useful in the case of companies whose business activity is dominantly based on the talent of the employees, as in the case of software industry. The scheme helps retain their most productive employees in an industry, which is known for its constant churning of personnel.

 

SEBI Guidelines Company whose securities are listed on any stock exchange can introduce the scheme of employees‘ stock option. The offer can be below:

 

 

1. Issue at discount Issue of stock option at a discount to the market price would be regarded as another form of employee compensation and would be treated as such in the financial statements of the company regardless the quantum of discount on the exercise price of the options.

 

2. Approval The issue of ESOPs is subject to the approval by the shareholders through a special resolution.

3.     Maximum limit There would be no restriction on the maximum number of shares to be issued to a single employee. However, in case of employees being offered more than 1 percent shares, a specific disclosure and approval would be necessary in the AGM.

 

4.     Minimum period A minimum period of one year between grant of options and its vesting has been prescribed. After one year, the company would determine the period during which the option can be exercised.

 

5.     Superintendence The operation of the ESOP Scheme would have to be under the superintendence and direction of a Compensation Committee of the Board of Directors in which there would be a majority of independent directors.

 

6.     Eligibility ESOP scheme is open to all permanent employees and to the directors of the company but not to promoters and large shareholders. The scheme would be applicable to the employees of the subsidiary or a holding company with the express approval of the shareholders.

7. Director‟s report The Director’s report shall make a disclosure of the following : a. Total number of shares as approved by the shareholders b. The pricing formula adopted c. Details as to options granted, options vested, options exercised and options forfeited, extinguishments or modification of options, money realized by exercise of options, total number of options in force, employee-wise details of options granted to senior managerial personnel and to any other employee who receive a grant in any one year of options amounting to 5 percent or more of options granted during that year d. Fully diluted EPS computed in accordance with the IAS IPO SEBI's stipulations prohibiting initial public offerings by companies having outstanding options should not apply to ESOP. If any ESOPs are outstanding at the time of an IPO issue by an unlisted company, the promoters‘ contribution shall be calculated with reference to the enlarged capital that would arise if all vested options were exercised.



Stock Option Norms for Software Companies

 

The relevant guidelines issued by the SEBI as regards employees stock option’for so companies are as follows:

 

 

1.     Minimum issue A minimum issue of 10 percent of its paid-up capital can be made by a software company which has already floated American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) or a company which is proposing to float these is entitled to issue ADR/GDR-linked stock options to its employees. For this purpose, prior permission from the Department of Economic Affairs is to be obtained.

2.     Mode of Issue Listed stock options can be issued in foreign currency convertible bonds and ordinary shares (through depository receipt mechanism) to the employees of subsidiaries of InfoTech companies.

 

3.     Permanent employees Indian IT companies can issue ADR/GDR linked stock options to permanent employees, including Indian and overseas directors, of their subsidiary companies incorporated in India or outside.

 

4.     Pricing The pricing provisions of SEBI’s prefere the scheme. The purpose is to enable the companies to issue stock options to its employees at a discount to the market price which serves as another form of compensation.

 

5.     Approval Shareholders‘ approval through a special resolution is necessary for issuing the ESOPs. A minimum period of one year between grant of option and its vesting has been prescribed. After one year, the company would determine the period in which option can be exercised.


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