Stock Option or 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 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 also offers an incentive to the employees to stay in the company.
Company whose securities are listed on any stock exchange can introduce the scheme of employees stock option. The offer can be made subject to the conditions specified below:
1. Issue at discount: Issue of stock options 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 option.
2. Approval: The issue of ESOP s 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.
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.
7. Director s report:The Director s report shall make a disclosure of the following:
a. Total number of shares as approved the shareholders
b. The pricing formula adopted
c. Details as to options grated, 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 received a grant in anyone 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
8. IPO: SEBI s stipulations prohibiting initial public offerings by companies having outstanding options should not apply to ESOP.
Stock Option Norms for Software Companies
The relevant guidelines issued by the SEBI as regards employees stock option for software 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.
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 Info Tech 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 preferential allotment guidelines would not cover the scheme. The purpose is to be 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.