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GROUP No. 4 Ridhi Sood Rajkamal Shah Unnati Shah Haresh Swaminathan
Overview of Case
Questions Involved
Wide coverage of employees To reward performing employees and motivate them to do
better Plan to cover employees of both WOS and Holding Company of LML Plan to be operational for 10 years Vesting of options to commence within 6 months of the announcement of the plan, and vesting to take place on the last day of each half year i.e. on 31st March and 30th September every year Vesting of options to be completed in 3 years Discount offered on the price of options to be reasonably encouraging to employees and also optimize the employee compensation expenses Is it possible for LML to issue ESOP to the employees of LM UK, its Holding Company within the same plan as per the applicable SEBI Guidelines
Employee Stock Option Plan (ESOP) ESOP is an option, a right, a choice given to employees to buy the shares of the company at a future date at a pre determined price
Restricted Stock Units (RSU) An employee receives stock which is settled in shares; the right to receive the shares may be subject to performance. Generally, the strike price is the face value of shares.
Phantom Stocks Employee receives phantom stock which is settled in cash for an amount equal to the value of defined number of shares. Methodology adopted is that of ESOP except that settlement is in cash. Stock Appreciation Rights (SAR) An employee receives shares or cash equal to the increase in the value of the specified number of shares over a specified period of time.
THE RATIONALE
Market pays, Not the Company from its
Cash kitty Attract and retain talent at start up / high growth stage Sense of ownership, particularly at a senior level Links personal wealth creation to the organizations value creation
Trust Route
A Trust is created for allotment of shares to employees Company issues shares to the Trust and the Trust further issues shares to the employees
ESOP
FEMA, 1999
Board Meeting for approval of draft ESOP General Meeting Notice to Shareholders
Inform Stock Exchange (SE) about ESOP Send Notice to SE as per Listing Agreement
prior to grant
Separate resolutions in case of grant of options to
Employees of holding or subsidiary company Identified employees, during one year, equal to or exceeding 1% of the issued capital
SEBI Guidelines
"employee" means
a permanent employee of the company working in India or out of
India; or a director of the company, whether a whole time director or not; or an employee as defined in sub-clauses (a) or (b) of a subsidiary, in India or out of India, or of a holding company of the company.
which the employee should exercise his right to apply for shares against the option vested in him in pursuance of the Employee Stock Option Plan. Grant means issue of option to employees under ESOP Vesting means the process by which the employee is given the right to apply for shares of the company against the option granted to him in pursuance of ESOP. Vesting Period is the period between the grant date and the date on which all the specified vesting conditions of an employee share-based payment plan are to be satisfied.
SEBI Guidelines
Eligibility for grants under ESOP/ESPS
Only permanent employees of the company or its subsidiary,
Promoters excluded
Exercise price -Freedom to determine the exercise price Vesting period - Minimum lock-in of one year between
grant & vest Company has freedom to specify the lock-in period post exercise Constitution of Compensation Committee Certificate from Statutory Auditors Placed before the shareholders at every AGM
SEBI Guidelines
Employee eligible not to include promoters and directors holding
10% or more of outstanding share capital Shareholder approval required Separate resolution for grants to
Employees of holding and subsidiary companies Identified employees holding = or > 1% of issued capital
Explanatory statement to include Price of shares and number of shares offered Eligibility of employees Total number of shares to be issued
Number of shares offered maybe different for different categories Special resolution to conform to accounting policies Freedom to determine the exercise price Shares issued to be locked in for a minimum period of one year from the date of allotment
financial statements Accounting value of options = intrinsic value / fair value of options Accounting value to be amortized over the vesting period In case of lapse of unvested options, the accounting to be reversed In case of lapse of vested options, the accounting to be reversed Options granted through a Trust Company required to account assuming the company has issued the options directly to the employees Two broad methods in place
Intrinsic Value Method
Intrinsic Value = Market Price Exercise Price Static Value as on a particular date Fair Value Method Amount for which the option can be exchanged between knowledgeable, willing parties in an arms length transaction Computed using an Option-pricing model like Black Scholes, Binomial valuation methods.
of the compensation expense account and is taken in the profit and loss account. Deferred Employee Compensation Expense Created at the time of grant of options for the total amount of compensation expense to be accounted. Part of the Balance sheet and forms a negative balance in the Shareholders equity or Net worth. Employee Stock Options Outstanding Account It is a part of the Shareholders equity and is transferred to Share Capital, Share Premium or General Reserves. Amortized employee stock compensation expenses are taken in the Profit and loss account.
Benefit Tax on ESOPs has been abolished ESOPs have been included in the definition of Perquisites under Section 17 (2) A person holding more than 10% of the shares in a company would not be eligible to participate in employee stock option plan or scheme of the company.
FEMA, 1999
An Indian Company may issue shares
under ESOPs to
Its employees, or Employees of its Joint Venture or Wholly
Owned Subsidiary abroad who are resident outside India Other than to citizens of Pakistan Citizens of Bangladesh can invest with the prior approval of the FIPB
FEMA, 1999
Conditions:
Scheme must be drawn in compliance with the SEBI (Employee Stock
Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 Face value of shares to be allotted to non-resident employees should not exceed 5% of the paid up capital
The issuing company shall furnish to the Reserve Bank , within thirty days
from the date of issue of shares under the scheme, a report giving the following particulars/documents, Names of persons to whom shares are issued under the scheme and
At the time of conversion of options into shares the Indian company has to
ensure reporting to the Regional Office concerned of the Reserve Bank in form FC-GPR, within 30 days of allotment of such shares.
provided under the SEBI Guidelines, 1999, LML can issue ESOPs to the employees of both its Wholly Owned Subsidiaries in India and South Africa.
months from the announcement of the plan. This would be a violation of the minimum lock-in requirement period as prescribed under the SEBI Guidelines, and hence, the management is advised to commence the vesting only after completion of one year from the date of grant of options.
year i.e. on the 31st March and 30th September every year, SEBI Guidelines provide freedom to the Company to take such decisions.
of its Wholly Owned Subsidiary in South Africa Hence, LML must comply with the FEMA requirements and furnish a report to the RBI within 30 days of issue of shares, along with the requisite certificate from Practising Company Secretary.
medium of ESOP to the employees of its Foreign Holding Company viz. LM UK PLC since employees of Foreign Holding Companies have not been categorized as Eligible Employees, both under SEBI Guidelines and FEMA
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Conclusion
In conclusion it can be stated that LML India Limited can effectively combine ownership and participative employment to reward its employees and motivate them by granting ESOPs to its employees and to employees of its Wholly Owned Subsidiaries, both in India and in South Africa. However, the employees of its Holding Company LM UK PLC cannot derive the benefits of the ESOP, being outside the purview according to the provisions of the applicant legislations.
seeking inputs from multinational companies and Indian listed and unlisted companies. The Survey was divided into fi ve sections:
A) Basic information of the company.
E) Conditions of exercise.
Participation - Industry
Out of the 203 companies having an active ESOP or who were considering implementing a plan: Approx. 40 percent (82) of respondents were from the ICE sector; and Approx. 16 percent of respondents were each from the Financial Services and Private Equity sector (33) and the Manufacturing and Consumer Goods sector (32) respectively.
6 7 ICE 11 40 BFSI Manu.& FMCG Health & Life Science Energy Real Estate 18 Others 16 2
11
47
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