SEBI (Share Based Employee Benefits) Regulations, 2014 – Securities Laws and Capital Markets Important Questions

Question 1.
Explain the provisions of the Companies Act, 2013 for the issue of shares to employees under a scheme of employees stock option.
Answer:
Employee Stock Option [Section 2(37)]: Employee stock option means the option given to the whole-time directors, officers, or employees of a company, which gives such directors, officers, or employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price.

As per Section 62(2) of the Companies Act, 2013, a company can offer shares to employees under a scheme of employees stock option by passing a special resolution and complying with specified conditions.

A listed company issuing employee stock options has to comply with the provisions of the SEBI (Share Based Employee Benefits) Regulations, 2014.

An unlisted company issuing employee stock options has to comply with the provisions of Rule 12 of the Companies (Share Capital & Debentures) Rules, 2014.

For the purpose of Section 68(2) and Rule 12, ‘employee’ means:
(a) A permanent employee of the company who has been working in India or outside India or
(b) A director of the company, whether a whole-time director or not but excluding an independent director or
(c) An employee of a subsidiary, in India or outside India, or of a holding company of the company but does not include:

  1. An employee who is a promoter or a person belonging to the promoter group or
  2. A director who either himself or through his relative or through anybody corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the company.

However, in the case of a startup company, the conditions mentioned in sub-clauses (1) and (2) shall not apply up to 5 years from the date of its incorporation or registration.

Question 2.
What disclosures are required to be made in the ‘Directors Report’ for ESOS & ESPS? [June 2009 (5 Marks)]
Answer:
The Board of Directors is required to disclose the following details in relation to ESOS & ESPS in the Director’s Report:

  • Options granted
  • Pricing formula
  • Options vested
  • Options exercised
  • Total number of shares arising as a result of the exercise of the option
  • Options lapsed
  • Variation of terms of options
  • Money realized by exercise of options
  • Total number of options in force
  • Employee-wise details of options
  • Diluted Earnings Per Share (DEPS)
  • Weighted-average exercise prices and weighted-average fair values of options

A description of the method and significant assumptions used during the year to estimate the fair values of options, including the following weighted-average information:

  • Risk-free interest rate
  • Expected life
  • Expected volatility
  • Expected dividends and
  • Price of the underlying share in the market at the time of option grant.

Question 3.
What do you understand by ‘Stock Appreciation Rights Schemes’ (SARs)? Explain with a suitable example.
Answer:
Stock appreciation rights (SARs) are additional compensation given to employees that are based on any increases in the price of company stock over a predetermined period of time. Employees benefit when the stock price rises, and are unaffected when the stock price declines. SARs can improve upon the stock option concept since there is no requirement for employees to pay for the exercise price of the stock. The payouts under a SARs plan are usually in cash, though the plan can be reconfigured to allow for payments in stock.

Example: An employee is granted 1,000 SARs, which cover any appreciation in the stock’s market price over the next 3 years. Suppose the current price is ₹ 225 per share.

If at the end of 3 years, the stock price rises to ₹ 250 per share. Consequently, the employee receives payment of ₹ 25,000 (1,000 SARs × ₹ 25 price increase per share).

Alternatively, the employee can be offered 100 shares for appreciation in the price of the stock. (25,000 4- 250)

Question 4.
How the various share-based employees benefit schemes can be implemented under the SEBI (Share Based Employee Benefits) Regulations, 2014?
Answer:
Implementation of schemes [Regulation 3(1)]: A company may implement share-based employees benefit schemes either:
(a) directly or
(b) by setting up an irrevocable trust(s).

However, if the scheme is to be implemented through a trust the same has to be decided upfront at the time of taking approval of the shareholders for setting up the schemes:

If the scheme involves secondary acquisition or gift or both, then it is mandatory for the company to implement such schemes through a trust.
SEBI (Share Based Employee Benefits) Regulations, 2014 – Securities Laws and Capital Markets Important Questions 1
Question 5.
Whether It is possible to implement several employees benefit schemes under a single trust? Also, state the essentials of such trust.
Answer:
Several schemes through single trust [Regulation 3(2)]: A company may implement several schemes as permitted under these regulations through a single trust.

Such single trust shall keep and maintain proper books of account, records, and documents, for each such scheme so as to explain its transactions and to disclose at any point of time the financial position of each scheme and in particular give a true and fair view of the state of affairs of each scheme.

Requirements for trust deeds [Regulation 3(3)]: SEBI may specify the minimum provisions to be included in the trust deed under which the trust is formed.

Trust deed and any modifications thereto shall be mandatorily filed with the stock exchange in India where the shares of the company are listed.

Question 6.
Which employees are eligible to participate in employees’ share-based benefit schemes? What type of procedural compliance is required when such nominee directors participate in such schemes?
Answer:
Eligibility [Regulation 4]: An employee shall be eligible to participate in the schemes of the company as determined by the compensation committee.

Explanation: Where such employee is a director nominated by an institution as to its representative on the board of directors of the company:
1. The contract or agreement entered into between the institution nominating its employee as the director of a company, and the director so appointed shall, inter alia, specify the following:
(a) whether the grants by the company under its schemes can be accepted by the said employee in his capacity as director of the company;

(b) that grant if made to the director, shall not be renounced in favor of the nominating institution; and

(c) the conditions subject to which fees, commissions, other incentives, etc. can be accepted by the director from the company.

  1. The institution nominating its employee as a director of a company shall file a copy of the contract or agreement with the said company, which shall, in turn, file the copy with all the stock exchanges on which its shares are listed.
  2. The director so appointed shall furnish a copy of the contract or agreement at the first board meeting of the company attended by him after his nomination.

Question 7.
Examining the provisions of the SEBI (Share Based Employee Benefits) Regulations, 2014, answer the following:
(i) In which cases the company can make variations in the schemes?
(ii) What procedure has to be followed to make such variations?
(iii) In which cases the company may re-price the Options, SAR, or Shares?
Answer:
Variation of Terms of the schemes [Regulation 7]:
1. The company shall not vary the terms of the schemes in any manner, which may be detrimental to the interests of the employees. However, the company shall be entitled to vary the terms of the schemes to meet any regulatory requirements.

2. The company may by special resolution in a general meeting vary the terms of the schemes offered pursuant to an earlier resolution of the general body but not yet exercised by the employee provided such variation is not prejudicial to the interests of the employees.

3. The provisions of Regulation 6 shall apply to such variation of terms as they apply to the original grant of the option, SAR, shares, or other benefits, as the case may be.

4. The notice for passing the special resolution for variation of terms of the schemes shall disclose full details of the variation, the rationale, therefore, and the details of the employees who are beneficiaries of such variation.

5. A company may reprice the options, SAR, or shares, as the case may be which are not exercised, whether or not they have been vested if the schemes were rendered unattractive due to falling in the price of the shares in the stock market.

However, the company ensures that such re-pricing shall not be detrimental to the interest of the employees, and approval of the shareholders in general meetings has been obtained for such re-pricing.

Question 8.
Discuss briefly listing of shares issued pursuant to any employees share-based benefit scheme under the SEBI (Share Based Employee Benefits) Regulations, 2014.
Answer:
Listing [Regulation 10]: In case a new issue of shares is made under any scheme, shares so issued shall be listed immediately in any recognized stock exchange where the existing shares are listed. Such listing is subject to the following conditions:

  • The scheme is in compliance with these regulations.
  • A statement as specified by SEBI is filed and the company has obtained in-principle approval from the stock exchanges.
  • As and when an exercise is made, the company notifies the concerned stock exchange as per the statement as specified by SEBI in this regard.

Question 9.
Write a short note on Accounting policies for employees share-based benefits
Answer:
Accounting Policies [Regulation 15]:
1. Any company implementing any of the share-based schemes shall follow the requirements of the ‘Guidance Note on Accounting for Employee share-based Payments’ or Accounting Standards as may be prescribed by the ICAI from time to time, including the disclosure requirements prescribed therein.

2. Where the existing Guidance Note or Accounting Standard does not prescribe accounting treatment or disclosure requirements for any of the schemes covered under these regulations then the company shall comply with the relevant Accounting Standard as may be prescribed by the ICAI from time to time.

Question 10.
Examining the provisions of the SEBI (Share Based Employee Benefits) Regulations, 2014, answer the following:
(i) Is any pricing norms are applicable for ESOS?
(ii) What is the minimum vesting period for ESOS?
(iii) Whether shares issued pursuant to ESOS are subject to a lock-in period?
(iv) Whether an employee has the right to receive the dividend in respect of the option granted to him?
Answer:
Administration and implementation of ESOS [Regulation 16]: The ESOS shall contain the details of the manner in which the scheme will be implemented and operated.

No ESOS shall be offered unless the disclosures, as specified by SEBI are made by the company to the prospective option grantees.

Pricing of exercise price in ESOS Scheme [Regulation 17]: The company granting an option to its employees pursuant to ESOS will have the freedom to | determine the exercise price subject to conforming to the accounting policies.

Vesting Period [Regulation 18(1)]: There shall be a minimum vesting period of 1 year in the case of ESOS. However, in the case where options are granted by a company under an ESOS in lieu of options held by a person under an ESOS in another company that has merged or amalgamated with that company, the period during which the options granted by the transferor company were held by him shall be adjusted against the minimum vesting period for transferee company.

Lock-in period for shares under ESOS Scheme [Regulation 18(2)]: The Company may specify the lock-in period for the shares issued pursuant to the exercise of the option.

Rights of the option holder [Regulation 19]: The employee shall not have the right to receive any dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to him, till shares are issued upon exercise of the option.

A consequence of failure to exercise option [Regulation 20]: The amount payable by the employee at the time of grant of option:
(a) may be forfeited by the company if the option is not exercised by the employee within the exercise period or
(b) maybe refunded to the employee if the options are not vested due to non-fulfillment of conditions relating to vesting of option as per the ESOS.

Question 11.
As a company secretary of listed company advise the board of directors of your company various steps to be taken for implementation of Employees Stock Option Purchase Scheme.
Answer:
Procedure for issuing ESOP by a Listed Company

  • Hold a Board Meeting to consider and approve ESOP and the formation of the Compensation Committee.
  • The compensation committee shall plan to draft the scheme of ESOP.
  • Hold Board Meeting to adopt the final scheme, appoint the Merchant banker and approve the notice of the General Meeting for shareholders approval.
  • Hold General Meeting for approval of shareholders.
  • Make an application to the stock exchange for obtaining in-principle approval of the stock exchange.
  • Issue of letter of the grant of an option to the eligible employees along with the letter of acceptance of option.
  • On receipt of the letter of acceptance of the option along with upfront payment (if any), the employee issue the option certificates.
  • After the expiry of the vesting period, not less than one year the options shall vest in the employee. At that time, the Company shall issue a letter of vesting along with the letter of exercise of options.
  • Receive letter of exercise from the employees.
  • Hold a Board Meeting at a suitable interval during the exercise period for allotment of shares on options exercised by the option grantee.
  • Dispatch of letter of allotment along with the share certificates or credit the shares so allotted with the Depositories.
  • Make an application to the Stock exchange for the listing of the shares so allotted.

Question 12.
Write a short note on Employees Stock Purchase Scheme (ESPS) [Dec 2010 (4 Marks)]
Answer:
“Employee stock purchase scheme or ESPS” means a scheme under which a company offers shares to employees, as part of a public issue or otherwise, or through a trust where the trust may undertake secondary acquisition for the purposes of the scheme.

In simple words, under the Employees Stock Purchase Scheme (ESPS), employees are given an option to purchase shares on the spot at a discounted price.

Important provisions relating to ESPS are summarized below:

  • The companies are free to determine the price of shares to be issued under an ESPS.
  • Shares issued under an ESPS shall be locked in for a minimum period of one year from the date of allotment.
  • If ESPS is part of a public issue and the shares are issued to employees at the same price as in the public issue, the shares issued to employees pursuant to ESPS shall not be subject to lock-in.

Question 13.
Write a short note on Employees Stock Option [June 2011 (4 Marks)]
Answer:
“Employee stock option scheme or ESOS” means a scheme under which a company grants an employee ‘stock option’ directly or through a trust.

It is the option given to employees of a company, which gives such employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price.

Example: X Ltd. grants its employee a right to subscribe 1,000 shares at ₹ 50 when its market price is ₹ 140. An employee can exercise such right after 2 years.

If after two years the price of the share is ₹ 180, the employee will exercise the option and can take 1,000 shares at ₹ 50. Assume that there is no lock-in period and the employee decides to sell the shares immediately. Total benefit to employee is ₹ 1,30,000 [(180 – 50) × 1,000].

If after two years the price of shares is ₹ 40 then the employee will not exercise the option as he will lose his money. Thus, ESOS is ‘option’ but not ‘obligation’.

Question 14.
Write a short note on Employees Stock Purchase Scheme (ESPS) [Dec 2012 (4 Marks)]
Answer:
“Employee stock purchase scheme or ESPS” means a scheme under which a company offers shares to employees, as part of a public issue or otherwise, or through a trust where the trust may undertake secondary acquisition for the purposes of the scheme.

In simple words, under the Employees Stock Purchase Scheme (ESPS), employees are given an option to purchase shares on the spot at a discounted price.

Important provisions relating to ESPS are summarized below:

  • The companies are free to determine the price of shares to be issued under an ESPS.
  • Shares issued under an ESPS shall be locked in for a minimum period of one year from the date of allotment.
  • If ESPS is part of a public issue and the shares are issued to employees at the same price as in the public issue, the shares issued to employees pursuant to ESPS shall not be subject to lock-in.

Question 15.
Distinguish between: Employees Stock Option Scheme & Employees Stock Purchase Scheme [Dec 2012 (4 Marks)]
Answer:
Following are the main points of difference between ESOS & ESPS:

PointsEmployees Stock Option SchemeEmployees Stock Purchase Scheme
Meaning“Employee stock option scheme or ESOS” means a scheme under which a company grants an employee ‘stock option’ directly or through a trust.An employee stock purchase scheme or ESPS means a scheme under which a company offers shares to employees, as part of a public issue or otherwise, or through a trust where the trust may undertake secondary acquisition for the purposes of the scheme.
Purchase of sharesUnder ESOS employees are given an option to purchase shares at a later date ie. after the vesting period.Under ESPS employees are given an option to purchase shares on the spot at a discounted price.
Lock-inThe company may specify the lock-in period for the shares issued pursuant to the exercise of the option.Shares issued under an ESPS shall be locked in for a minimum period of 1 year from the date of allotment.
Public issueESOS has to be approved separately by the company in general meetings by passing a special resolution. It cannot be part of a public issue.Shares under ESPS can be issued as a part of a public issue.
Vesting periodThe minimum vesting period for ESOS is one year.No vesting periods for ESPS as shares are offered on the spot.
Compensation CommitteeA company has to constitute a Compensation Committee for administration & superintendence of the ESOS.There is no such requirement for ESPS.

Question 16.
The option to participate in ESOS is not open for all employees of the company. Comment. [Dec 2013 (4 Marks)]
Answer:
As per the SEBI (Share Based Employee Benefits) Regulations, 2014 employees which get covered as per Regulation 2(1)(f) are eligible to participate in the scheme.

Employee [Regulation 2( 1)(f)]: Employee means:

  1. A permanent employee of the company who has been working in India or outside India or
  2. A director of the company, whether a whole-time director or not but excluding an independent director or
  3. An employee as defined in clause (1) or (2) of a subsidiary, in India or outside India, or of a holding company of the company but does not include:
    (a) An employee who is a promoter or a person belonging to the promoter group or
    (b) A 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.

Thus, it is correct to say that the option to participate in ESOP/ESPS is not open for all employees of the company.

Question 17.
What is an employee stock option plan? Explain the importance of such plans in modern times. [Dec 2017 (5 Marks)]
Answer:
Employee Stock Option Plan (ESOP) or Employee Stock Option Scheme (ESOS) is a plan or scheme under which the company grants employee stock options. Employee stock option is a contract that gives the employees of the enterprise the right, but not the obligation, for a specified period of time to purchase or subscribe to the shares of the company at a fixed or determinable price which is generally lower than the prevailing market price of its shares.

The importance of these plans lies in the following advantages which accrue to both the company and the employees:

  • Stock options provide an opportunity for employees to participate and contribute to the growth of the company.
  • The stock option creates long-term wealth in the hands of the employees.
  • They are important means to attract, retain and motivate the best available talent for the company.
  • It creates a common sense of ownership between the company and its employees.

Question 18.
Explain the Stock Appreciation Rights Scheme (SARS). [Dec 2018 (5 Marks)]
Answer:
Stock appreciation rights (SARs) are additional compensation given to employees that are based on any increases in the price of company stock over a predetermined period of time. Employees benefit when the stock price rises, and are unaffected when the stock price declines. SARs can improve upon the stock option concept since there is no requirement for employees to pay for the exercise price of the stock. The payouts under a SARs plan are usually in cash, though the plan can be reconfigured to allow for payments in stock.

Example: An employee is granted 1,000 SARs, which cover any appreciation in the stock’s market price over the next 3 years. Suppose the current price is ₹ 225 per share.

If at the end of 3 years, the stock price rises to ₹ 250 per share. Consequently, the employee receives payment of ₹ 25,000 (1,000 SARs × ₹25 price increase per share).

Alternatively, the employee can be offered 100 shares for appreciation in the price of the stock. (25,000 4- 250)

Question 19.
Answer the following with reference to the Companies (Share Capital and Debentures) Rules, 2014, as to whether these are the eligible employees under Employee Stock Option? (Yes/No with reasons)
(i) Ankit is a permanent employee deputed in the USA for a specific project.
(ii) Smart Ltd. is an independent company.
(iii) Anil is a promoter and employee.
(iv) Aneesh is a director holding 11% of the outstanding equity shares of the company.
(v) If it is a Start-up company, will the situation be the same in (iii) & (iv) above? [Dec 2018(5 Marks)]
Answer:
As per Section 62(2) of the Companies Act, 2013, a company can offer S shares to employees under a scheme of Employees Stock Option by passing a special resolution and complying with specified conditions.

A listed company issuing employee stock options has to comply with the provisions of the SEBI (Share Based Employee Benefits) Regulations, 2014.

An unlisted company issuing employee stock options has to comply with the provisions of Rule 12 of the Companies (Share Capital & Debentures) Rules, 2014.

For the purpose of Section 68(2) and Rule 12, ‘Employee’ means:

  • A permanent employee of the company who has been working in India or outside India.
  • A director of the company, whether a whole-time director or not but excluding an independent director.
  • An employee of a subsidiary, in India or outside India, or of a holding company of the company but does not include:
    1. An employee who is a promoter or a person belonging to the promoter group or
    2. A 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.

However, in the case of a startup company, the conditions mentioned in sub-clauses (z) and (ii) shall not apply up to 5 years from the date of its incorporation or registration.

Considering the above provisions and definition of ‘employee’ as given in Rule 12 j of the Companies (Share Capital & Debentures) Rules, 2014, the answer to the given problem is as under:

  1. Ankit being a permanent employee is covered by the definition of ‘employee’ and hence eligible for benefits under the Employees Stock Option Scheme.
  2. Smart Ltd. being a company is not covered by the definition of ‘employee’ and hence not eligible for benefits under the Employees Stock Option Scheme.
  3. Anil being a promoter is not covered by the definition of ’employee’ and hence not eligible for benefits under the Employees Stock Option Scheme,
  4. Aneesh is a director and he holds more than 10% shares; he is not covered by the definition of ‘employee’ and hence not eligible for benefits under the Employees Stock Option Scheme.
  5. If the company is a Start-up Company then Anil and Aneesh will be eligible for benefits under the Employees Stock Option Scheme.

Question 20.
Your Board of directors is contemplating to take-up the agenda to issue ESOS in the next meeting. Being a Company Secretary, advise your Board of directors about a brief procedure for issuing securities under SEBI Employees Stock Option Scheme (ESOS) by a listed Company. [June 2019 (5 Marks)]
Answer:
Procedure for issuing ESOP by a Listed Company

  • Hold a Board Meeting to consider and approve ESOP and the formation of the Compensation Committee.
  • The compensation committee shall plan to draft the scheme of ESOP.
  • Hold Board Meeting to adopt the final scheme, appoint the Merchant banker and approve the notice of the General Meeting for shareholders approval.
  • Hold General Meeting for approval of shareholders.
  • Make an application to the stock exchange for obtaining in-principle approval of the stock exchange.
  • Issue of letter of the grant of an option to the eligible employees along with the letter of acceptance of option.
  • On receipt of the letter of acceptance of the option along with upfront payment (if any), the employee issue the option certificates.
  • After the expiry of the vesting period, not less than one year the options shall vest in the employee. At that time, the Company shall issue a letter of vesting along with the letter of exercise of options.
  • Receive letter of exercise from the employees.
  • Hold a Board Meeting at a suitable interval during the exercise period for allotment of shares on options exercised by the option grantee.
  • Dispatch of letter of allotment along with the share certificates or credit the shares so allotted with the Depositories.
  • Make an application to the Stock exchange for the listing of the shares so allotted.

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