A Brief about ESOP- Employee Stock Option Plan

Dear Professionals

Smiles for All

In this write will be discussing about Employee Stock option plan (ESOP), how this impact an organization?, How It gives benefits to organization and employees and what are the regulatory requirements in case of Private Companies Mainly.

Employee Stock Option Plan (ESOP) is the option provided to employees to purchase the shares of the company at a future date at a pre-determined price. ESOPs give the employee a right to purchase the share, but not an obligation, to buy a certain amount of shares in the company at a predetermined price for a certain number of years. Therefore, if the shares of the company are valued at less than the option exercise price, then the employee need not excise the right to buy the shares of the company.

KEY POINTS

·         An employee stock ownership plan gives workers ownership interest in the company.

·         ESOP is usually formed to allow employees the opportunity to buy stock in a closely held company to facilitate succession planning.

·         ESOPs encourage employees to do what's best for shareholders since the employees themselves are shareholders and provide companies with tax benefits, thus incentivizing owners to offer them to employees.

·         Companies typically tie distributions from the plan to vesting.

COST OF IMPLEMENTATION OF ESOP TO COMPANY:

Apart from dilution in shareholding of promoters, the company should keep the following expenses in mind:

Fees payable to Registered valuer and the Merchant Banker for Valuation of shares

Fees payable to consultant for implementation and supervision of ESOP.

Administration cost throughout it’s tenure

OPERATIVE ASPECTS OF ESOP (Employee Stock Option Plan)

1. ESOPs have an exercise period – the pre-determined period within which the option must be exercised   by the employee. There must be a minimum period of one year between the grant of option and vesting of option.

2. Option granted to employees is not transferable to any other person.

3. ESOPs have a Vesting Period and Vesting Percentage. Vesting period is the amount of time the employee needs to work with the company to be eligible for the ESOP.

4. It can’t be offered to Promoters or Directors who directly or indirectly hold 10% shares in the company nor can be offered to non-employees.

5. A typical lifecycle of ESOP can be depicted as under:

6. Valuation shall be done (Fair value of shares) at the time of “grant of Option” and “exercise of option” by registered valuer as per “Guidance note on accounting for employee share-based payment” and pursuant to the Rule 40D of Income Tax Rules ,1962 which provides that FMV of ESOP shall be as determined by a merchant banker on the specified date Therefore, valuation is to be done every time when the options are granted and /or exercised. Valuation not older than six months will be considered valid.

7. There is no ready market for shares of a Pvt Ltd Co. unlike listed companies. Marketability of such shares are generally discussed at the time of launch of the scheme and generally promoters come forward with assurances and commitment through scheme document. Employees would have following Exit options for disposal of shares:

IPO

To Strategic buyer / Investor, etc

Company buyback

Selling to an external buyer, subject to the Articles of Association

TAXATION IN THE HANDS OF EMPLOYEE CONCERNED:

Taxation takes place at 2 stages i.e. when the option is exercised and secondly when the shares are disposed:

While selling – in the form of capital gain. An employee might sell his shares after buying them. In case he sells these shares at a price higher than FMV on the exercise date, he would be liable for capital gains tax.

REGULATORY REQUIREMENTS FOR A PVT LTD COMPANY FOR IMPLEMENTING ESOP

1. Maximum Number of shareholders in   Private Limited Company    is allowed to be 200.  If this limit is breached by ESOP, the company has to be converted into a Public Limited Company.

2. Articles of Association i.e. Charter of company should   have enabling provisions or allowing the ESOP.  If not, then amendment would be required by convening AGM/EGM.

3. There has to be sufficient authorized capital to accommodate the ESOP allotments.  If not, then MOA and AOA need alterations.

4. EGM (Extra Ordinary General Meeting) has to be conducted for ESOP Scheme approval by shareholders by way of a special resolution. Disclosures in the Explanatory Statement (Rule 12(2)) for passing the special resolution should cover following aspects:

Total number of stock options to be granted

Identification/ Appraisal process for determining the eligibility of employees;

Requirements of vesting and vesting period and the maximum period within which the option shall be vested;

Exercise Price/Pricing Formula/Exercise Period/Method of valuation;

Lock in period, if any;

Maximum no. of ESOPs to be granted per employee and in aggregate;

5. Each year, the Board of Directors in the Directors Report must report the following details of the ESOP plan:

Options granted/vested/exercised/lapsed.

Total number of shares arising as a result of exercise of options;

Exercise Price;

Variation of terms of options;

Money realized by exercise of options;

Total no. of options in force

Employee wise details of options granted to:

6. The company must maintain an ESOP Register (Form SH-6 (Rule 12(10),   giving information about the option granted to employees.

CONCLUDING NOTE:

Once the ESOPs are established, the company needs a proper administration including the third-party administration, trustee, valuation, legal costs. Company owners and the management must be aware of the ongoing costs. In case the cash flow which is dedicated to ESOPs limits the cash available for reinvesting in the business over a long-term, the ESOP scheme isn’t a good fit for such a company.

(The author is a Jaipur based Company Secretary and can be reached on 7021848742, csannusharma123@gmail.com)

The Prevention of Sexual Harassment (POSH) at workplace Act -An overview

In today’s Topic I am going to write down about very serious topic for working women. Its an attempt make our professionals much more aware about the safety of woman at work place to give her safe working environment, I.e. to protect her from being harassed at work place.

I am forced to Pen Down this write up today because recent I came to know that one of my fellow faced some mental harassment just because she could not take action on the incident happened with her, So for you all who are engaged in any business entity may take benefit of it and also let others to get benefitted.

This Incident happened just after resume of business activity, post lockdown she joined office almost after 1 month and she asked for more leaves since she has small child at home whom she can’t sent to crèche etc. as per present scenario also due to work load at her place she couldn’t give her 100% at work . The organization where she were working for more than 2 years the employer on her request replied that “ instead of working from home you have done so much enjoy just look how much fatty you become”. & you are asking for much more leaves.

For some people this conversation might be very normal but for her it was a torture at front of office staff but She couldn’t take action as there was no internal complaint committee to report about this, Even though there Director’s Report had a clause regarding the same hopefully no other women would face such kind of mental harassment here we start discuss about the POSH Act.

The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act and the Rules (collectively known as POSH Laws) have been enacted and passed by the Ministry of Women and Child Welfare, in the year 2013. These laws are applicable upon every workplace, establishment, company, and organization, inclusive of MNCs, firms, shops, restaurants, etc.

LET’S FIRST START WITH THE APPLICABILITY OF THE ACT.

The Prevention of Sexual Harassment (POSH) at workplace Act is applicable to every workplace, establishment, company or organization employing 10 or more employees (full time, part time, interns or consultants included) irrespective of its location or nature of industry.

This is a pro tip for the professionals, Specially Company Secretaries if in your Organization No. of employees are more than 10 then implement the same today if not yet applied.

Non-compliance with POSH (Prevention of Sexual Harassment) can cost an employer a monetary penalty of INR 50,000. On repeated non-compliance, the employer may be penalized with twice the punishment. Non-compliance can also lead to cancellation of license, withdrawal or non-renewal of registration for carrying on business, by the Government or local authority.

t has been made mandatory to include a statement in the Director’s report that the company has complied with provisions relating to the constitution of the Internal Complaints Committee (ICC) under POSH laws.The Companies (Accounts) Rules, 2014 have been amended to mandate the disclosure regarding the implementation of the Sexual Harassment of Women at Workplace Act (POSH laws) in the Director's report of every company.

WHAT ARE THE COMPLIANCES UNDER THIS ACT ?

1. Committee: Each organization with more than 10 employees is required to form an Internal Complaints Committee headed by a “Female Presiding Officer”,

2. Policy: Formulation of an internal POSH policy for the prevention and redressal of sexual harassment at workplaces.

3. Workshops: Orientation and training programmes are also required to be carried out by the organization for awareness of this act. The notices need to be displayed in visible locations of the office so that they are accessible and visible to everyone i.e. employees, visitors, interns etc.

4. Annual Report: The organizations are also required to file an annual report with the information of the number of sexual harassment complaints received in a year, the number of complaints disposed of in a year, cases pending for more than 90 days, etc.

Reporting under Directors Report:

The Ministry of Corporate Affairs, through a Notification dated July 31, 2018, amended the Companies (Accounts) Rules 2014, in accordance with the request made by the Ministry of Women and Child Welfare.

By this amendment, it is now mandatory to disclose that the company has implemented the provisions of the Sexual Harassment Act.

It is now compulsory for a company to make a statement in the Director’s Report that it has complied with the provisions regarding the constitution of the Internal Complaints Committee (ICC).

This amendment comes as a major step towards making the workplaces in the private sector safer for women, thereby casting higher responsibility on the Board of Directors to ensure compliance under the POSH Laws. Penal provisions that ensue in case of non-disclosure under Section 134 of the Companies Act will now be levied in the matters of non-disclosure of the implementation of the Sexual Harassment Act as well.

INTERNAL CONTROL COMMITTEE:

Every employer is obliged to constitute an ICC through a written order. The ICC will be composed of the following members:

No	Member	Eligibility
1.	Chairperson	Women working at senior level as employee; if not available then nominated from other office/units/ department/ workplace of the same employer
2.	2 Members (minimum)	From amongst employees committed to the cause of women/ having legal knowledge/experience in social work
3.	External Member	From amongst NGO/associations committed to the cause of women or a person familiar with the issue of Sexual Harassment

SEXUAL HARASSMENT AT WORKPLACE POLICY

Employers/District Officers are responsible for complying with prohibition, prevention and redress of workplace sexual harassment. In practice, this means having a policy that:

(1) prohibits unwelcome behaviour that constitutes workplace sexual harassment;

(2) champions prevention of workplace sexual harassment through orientation, awareness and sensitization sessions; and

(3) provides a detailed framework for redress.

DISSEMINATION OF INFORMATION AND AWARENESS GENERATION

Employers/ District Officers have a legal responsibility to:

1. Effectively communicate a policy that prohibits unwelcome behaviour that constitutes workplace sexual harassment, and provides a detailed framework for prevention, and redress processes.

2. Carry out awareness and orientation for all employees.

3. Create forums for dialogue i.e. Panchayati Raj Institutions, Gram Sabhas, Women’s Groups, Urban Local Bodies or like bodies, as appropriate.

4. Ensure capacity and skill building of Complaints Committees.

5. Widely publicize names and contact details of Complaints Committee members.

ANNUAL REPORT:

As per Prevention of Sexual Harassment Act, 2013, there are 2 reports to be submitted by the employer:

1. It is the duty of the ICC to submit an annual report, which includes the number of cases filed/disposed of every calendar year to the employer and district office.

2. The employer has a statutory obligation to ensure this report is included in the annual report of the organization filed to the Registrar of companies.

DISQUALIFICATIONS OF MEMBERS

The POSH Act prescribes the following grounds which would disqualify a person from membership of the ICC:

1. Disclosure by the person of matters which are required to be kept confidential under the POSH Act, such as information regarding the complaint submitted to an ICC, identity of the complainant, the respondent or witnesses, details of inquiry proceedings and recommendations of the ICC, or action taken by the employer.
2. If the person has been convicted, or an inquiry is pending against such person, of any offence under any law.
3. Similarly, if the person has been found guilty, or an inquiry is pending against such person, with regard to any disciplinary proceedings.
4. Where the person has abused their position, rendering their continued membership in the ICC to be prejudicial to public interest.

On occurrence of any of the above grounds, the applicable member(s) would have to step down and be replaced with individuals possessing suitable qualifications as applicable to the relevant category of membership.

WHO IS A DISTRICT OFFICER (DO)?

State Governments will notify a District Magistrate/Additional District Magistrate/ Collector/ Deputy Collector as a District Officer at the local level. The District Officer will be responsible for carrying out the powers and functions under the Act at the district levels (including every block, taluka, tehsil, ward, and municipality).

PART-I

Section 21 – Internal Committee to submit annual report:

As per the Act – “(I) The Internal Committee or the Local Committee shall in each calendar year prepare, in such form and when may be prescribed, an annual report and submit the same to the employer and the District Officer.

PART-I

The District Officer will forward a brief report on the annual reports to the appropriate State Government. Such reports must include the following information:

1. No. of complaints received;

2. No. of complaints disposed of;

3. No. of cases pending for more than 90 days;

4. No. of workshops/awareness programmes carried out;

5. Nature of action taken by the employer/DO;

The Report of ICC will be forwarded to the DO through the employer.

Section 22 – Employer to include information in the Annual report

As per the Act – “The employer shall include in its report the number of cases filed, if any, and their disposal under this Act in the annual report of his organisation or where no such report is required to be prepared, intimate such number of cases, if any, to the District Officer.”

The latest Director’s Report submitted under the Companies Act has a section to capture the compliance to the PoSH Act, 2013. This report is filed along with the Annual returns to the Registrar of companies.

CONCLUSION

The POSH Act prescribes that failure by an employer to constitute an ICC is an offence punishable with fine for an amount of up to Rupees Fifty Thousand. Further, an employer convicted for the same offence at the second instance may be punishable with a fine for twice such amount, as well as be liable to cancellation or non-renewal of its business licenses, registrations or approvals by the government or local authorities.

(Author – CS Annu Sharma, is a Company Secretary  from Delhi and can be contacted at csannusharma123@gmail.com)

Discremination on Caste or a Domination of New Employee ?

An Employee: Mr. Akram was appointed in the month of February, 2020 as a CEO of an Organization dealing in traditional goods since an era, where the employee was a CFO at a very nominal pay having vast experience.

If I describe about the skill set of the employee, he was flooded with knowledge and has very technical approach to work, on the other side Organization was big enough in terms of market but not in terms of growth. Existing employees were too rigid to deal and having enough smartness to backbite each other with very political environment.

Gradually Mr. Akram were creating his pitch on the work and grasping everything quickly to gel up with everyone.

But other Co-workers having more than 7 years experience in the same organization did not like it and started jealous from him,  days were passing but after so much of hardwork  Mr. Akram was not being satisfied and he was also smelling the jealousy aroma in the organization.

One Day he visited the Plant of the organization and after audit he ask the supervisor to certify the audit done by him but the supervisor who is very old and having traditional approach denied that he never certify this and he won’t do the same now as well.

Another day, The office boy named as ram came to Mr. Akram to sign some petty cash bill so that the office boy can get his reimbursement, Mr. Akram asked some details about the bills of Xerox, Stationary and other food item but instead of co-operating that office boy shouted and took back the receipts and said I never clarify such details don’t sign I ll get them signed from the other seniors.

Same Day he asked his junior accountant some details about the reports he prepared frequently but those details were found incomplete by the owner of the company therefore he advised the junior accountant to prepare them in apt manner so the report could be found useful but the same thing happened the Junior Akash so rigidly replied: that I always send the reports like this and I won’t change or comment on that as I have so much work to do and it’s not my responsibility to remark them , Go and complain about me if you wish to do the same.

People around were just gossiping that all these Mohammed’s are same and this Akram why he being so bossy to us, now he will teach us how to work? Oh he won’t stay much in the organization.  

Now Akram is thinking that why all of them have so rigid nature and none of them is techno friendly and don’t want to move towards improvement in their traditional approach. Next Day he remains absent from the office and again people were gossiping about them and just being rigid on the same pace.

What I found and observe when people don’t want to be change or don’t want come out from their comfort Zone they just Gossip and remove the reason for Change. Its all what I learn from this short story with some big logics behind.

Thanks and Regards

CS Annu Sharma

Drop Mail or Msg if you want to share your problems connecting to the same : csannusharma123@gmail.com    +91-7021848742