Company Stock Programs in India

8/3/2019 Company Stock Programs in India

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By:

Esha Khanna

Harshit Upadhyay

Malika JacobPreeti Kumar

VaisaliTiwari

Vishakha Dave

Company Stock Programs in India


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What is Stock Option

A stock option is the opportunity, given by

the employer, to own a certain number of

shares of the company's common stock at apre-established price, known as the grant

price, over a specific period of time, known

as the vesting period


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What it DoesyAttraction and retention of talent for positions of substantialresponsibility

yCreates commonality of interest between employees and

shareholders

yProvides great incentive and motivation to employees

yEncourages risk sharing between stakeholders

yOffers most tax efficient compensation for employees


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Some Prominent

Companies in Indiagoing in for Stock

Options


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Central Government Guidelines

y Covers companies

y Listed in a recognized stock exchange in India Recognized

by SEBI

y

Listed in a recognized stock exchange outside India Recognized by similar regulatory authority

y Unlisted domestic company

y Subsidiary or holding company of a company referred

above


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Employees Stock Option Plans (ESOPs)

Grant of rights to purchase company shares at future date

Employees have an option but no obligation to purchase

Price is predetermined

Price can be fair value (FV) based or at discount to FV

Vesting period can be flexible minimum statutory period of 12months

Method of exercise : Cash exercise

Cashless exercise


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Types ofESOPs in India

1) ISO Incentive stock options

These are also known as qualified stock option because they qualify to receivespecial tax treatment. No income taxes are due at grant or exercise, rather thetax is deferred until the stock is sold.

2) Put option

It is a financial contract between two parties - The writer (seller) and the buyerof the option. The buyer acquires a long position by purchasing the right to sell,the underlying instrument to the seller of the option for a specified price (thestrike price) during a specified period of time

3) Non-qualified Stock Option they are stock options which do not qualifyfor the special treatment accorded to incentive stock options. In contrast to ISO,NQSO result in additional taxable income to the recipient at the time at whichthey are exercised, the amount being the difference between the exercised priceand the market value on that date.


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Stock Purchase Plan

Offer of shares to employees as part of public issue or

otherwise

To encourage ownership of company

Loan may be granted

Monetary equivalent of increase in value of specifiednumber of shares

Generally paid in cash but can also be paid in shares

To minimise cost, regulatory requirements

Owners unwillingness to dilute

Stock Appreciation Rights(SARs)


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ESOP Administration- As per SEBI

Guidelines

y Must constitute a Compensation Committee (CC) of the Board to consist of majority independent Directors

y Prescribed particulars must be disclosed to prospective Optiongrantee

y CC responsible for framing policies and systems to ensurecompliance with InsiderTrading and Fraudulent and UnfairTradePractices in SecuritiesMarket Regulations

y CC shall formulate terms and conditions including:

- quantum of Options to be granted per employee and in the aggregate

- conditions under which vested Options may lapse upon termination or misconduct

- exercise period both during employment and after termination

- mode of exercise: all at one time or in installments

- procedure for cashless exercise


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Who Can Participate in ESOP

y Permanent employees working in India or out of India

y Directors of the company

y

Employees or Directors of subsidiary companies in India or out of India or of holdingcompany

y Employees who are promoters or belonging to promoter group cannot participate inESOP

y Directors holding directly or indirectly more than 10% of the outstanding equitycannot participate in ESOP

y Options to non residents not to exceed 5% of the paid up Capital RBI may granthigher limit


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Bottlenecks in ESOP implementation

y In the US, ESOPs are used to push productivity, link reward

to performance and align the interests of the shareholders

and executives

y

In India, where ESOP adoption is still in its early stage,companies use stock options to attract and retain employees

y Its used as a carrot, dangled in front of employees so they

dont quit. Its a long-term incentive but employees dont

seem to get the pointy ESOPs are not considered part of compensation in many

Indian organizations and are not communicated as such


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Sweat Equity Sharey The phrase Sweat Equity Shares means it is given to the employees

on favourable terms in recognition of their work

y It usually takes the form of giving option to the employees to buyshares of the company so they become part owners and participate

in the profits apart from earning salaryy Sweat equity shares by definition could be issued only to the

employees or directors of the company incorporated under theCompaniesAct, 1956

y The allotment of sweat equity should be at a discount or

consideration other than cash. Sweat equity could be issued inconsideration of providing know-how or making available rights inthe nature of intellectual property or for value additioncontributed by such employee or director


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Thank You

Company Stock Programs in India

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