FREE online courses on ESOP - How Does ESOP Work - Rules & Regulations
Issue of stock options requires approval of shareholders by
way of a special resolution as per section 81(1 a). This is not applicable for
private companies who can issue stock options without shareholder approval but
approval by the board of directors.
Income Tax Issues
For employees:
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Till recently, the difference between the cost of the
share to the employees and market value on the date on which an employee
got the share would be taxed as perquisite in addition to capital gains
tax payable by the employee on sale of those shares.
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However with the recent announcement by the Finance
Minister the perquisite tax has been removed. Tax is now payable only at time
of sale of shares as capital gains.
Since perquisite tax has been removed employers are not
liable for tax deduction at source, thus removing administrative inconvenience.
For the company:
As per SEBI guidelines listed companies have to account for
ESOP by treating the same as an expense. As yet there is no clarity whether this
expense will be allowed as deductible expense by the Income Tax authorities.
ESOP of Overseas Parent Company
Reserve Bank of India permits acquisition of shares of
overseas parent Company by employees of the Indian Company subject to the
following: -
- The
overseas parent Company must hold at least 51% shares in the Indian Company
- The
shares must be offered at a concessional rate. The discount can be from the
parent or the Indian company.
- The
maximum entitlement is US $ 10000 per employee in a block of 5 years.
Permission for an individual employee is not required and the monetary limit of
USD 10000 does not apply if shares are being offered to the employees in lieu
of Bonus.
- In case
of a cashless exercise of options the above guidelines do not apply provided
gains made by the Indian employee are repatriated to him through normal banking
channels immediately.
There is also a scheme for employees of software companies in
India to have ADR/GDR linked stock option plans, which should satisfy the
following criteria:
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Companies whose turnover from software activities is not less than 80% can
grant stock options to non-resident and resident permanent employees (including
Indian and overseas working directors) of the company as well as its
subsidiary, but not to promoters and their relatives (as defined in the
Companies Act).
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Employees can remit up to U.S. $ 50,000 in a block of five years for
acquisition of ADR/GDR and on liquidation of the ADR/GDR holdings the proceed
have to be repatriated to India unless permission from RBI is obtained for its
retention or use abroad.
- The
maximum limit is 10% of issued and paid up equity capital and the maximum
discount is 10% to the market price prevailing at the time of issue of the
stock option.
The SEBI guidelines are applicable only to companies listed
in India and are as follows:
Who is covered?
Any employee except the promoter or director (holding more
than 10% equity)
Requirements
- Setting
up of Compensation Committee of the board, for administration and
superintendence of ESOS - the majority being independent directors.
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Shareholder Approval – Any ESOS has to be approved by shareholders, through a
special resolution in the general meeting, disclosing to them details about the
ESOS like – the total number of options to be granted; identification of
classes of employees entitled to participate in the ESOS; requirements of
vesting and periods of vesting; the appraisal process for determining the
eligibility of employees to the ESOS; maximum number of options to be issued
per employee and in aggregate.
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Disclosure in the Director's Report – The Board of Directors has to disclose
all the details of the ESOS including employee-wise details in the Director's
report.
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Compliance with Accounting Policies
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Certificate from Auditors that the scheme has been implemented according to the
guidelines and in accordance with the resolution of the company in the general
meeting.
Non-variation of terms of ESOS
Terms of the ESOS cannot be varied in any manner, which may
harm the interests of the employee. However they may be changed through a
special resolution in a general meeting provided the employee has not yet
exercised the ESOS.
Pricing
Companies have the freedom to determine the exercise price
subject to conforming to the accounting policies specified. Any discount from
the fair market value has to be reflected as deferred employee compensation in
the accounting entries.
Lock-in period &
Rights of the option-holder
The company has the freedom to specify the lock-in period,
there being a minimum period of 1 year between the grant of options and
vesting of options.
The employee will not enjoy the benefits of a shareholder,
till shares are issued on exercise of option
The company, if any, at the time of grant of option
may forfeit the amount payable by the employee, if the option is not exercised
within the exercise period or may be refunded to the employee if the options
are not vested due to non-fulfilment of condition relating to vesting of
option as per the ESOS.
Non-transferability of option
Options granted to an employee shall not be transferable to
any person. In the event of the death of employee while in employment, all the
option granted to him till such date shall vest in the legal heirs or nominees
of the deceased employee.
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Accounting for Employee Stock Option Plans in
accordance with US GAAP is governed by statement No.123 (FAS 123),
Accounting for Stock Based Compensation issued by the Financial
Accounting Standards Board (FASB) and opinion No.25 (APB25) Accounting
for Stock issued to Employees issued by the Accounting Principles Board.
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- In the
US GAAP Hierarchy FASB statements and interpretations override APB opinions.
FAS 123 states that companies issuing stock options must value the options on
the date of grant, using a option valuing model, preferably Black Scholes and
the value of the option has to be treated as compensation cost, to be
recognized over the service period, which is usually the vesting period.
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However, FAS 123 also allows for companies to account for employee stock
options using the intrinsic value method prescribed by APB 25. Under the
intrinsic value method, compensation cost is the excess of the quoted market
price of the shares on the grant date or other measurement date over the
exercise price.
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Companies choosing to follow the intrinsic value, method must make Performa
disclosures of net income and EPS as if the fair value method prescribed by FAS
123 had been followed.
- In case
of variable plans like Stock Appreciation Rights and other plans where the
number of shares, exercise price or both are contingent on a future event, the
accounting treatments is based on the share price at the balance sheet date.
For example, in case of Stock Appreciation Rights with a vesting period of 2
years with grant price being market price on grant date (say Rs.100), entitling
the holder to receive the appreciation in market price over the grant in the
form of shares.
If the SARs are granted on 1.4.2000 and the market price on
31.3.2000 is Rs.200, then Rs.100 will have to be treated as compensation cost,
to be amortized over 2 years.
FASB has also issued a final interpretation of APB 25,
primarily covering: -
Treatment of equity awards to non-employees
Modifications of existing awards
