how the employees stock option scheme be implemented
DESCRIPTION
We have tried to tell how the ESOP may be implemented successfully without any interruptions and helps in understanding the law in a better way. It cautious us to take care of factors which may create problems in future / later on .TRANSCRIPT
EMPLOYEE STOCK OPTIONS
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Index Nature of Employee Stock Options
(ESOP) Main concepts used in ESOP Main concepts explained with
example Granting of Options Vesting of Options Exercising of Options Points to be decided for preparing the
ESOPIOLCP
Nature of Employee Stock Options (ESOP)
Employee stock options are rights
granted by the company to its employees to apply its own shares of the company at a exercise price determined at the time of granting ( giving ) of options.
They are to be paid at the time of issue of shares.
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Main concepts used in ESOP…….countined
Eligible Employee: permanent employee of the
company excluding promoter or persons holding 10% or more of holding and independent director
Grant/Granting of options: means when an employee given an option(s)
Vesting / Vesting of options: means when an employee is given right to apply for shares in the company .
Vesting period: means the period after which an employee is entitled to apply for shares in the company .
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Main concepts used in ESOP
Exercise price: means the price at
which the employee have right to apply for the shares in the company .
Exercise period : means the period during which an employee is entitled to apply for shares in the company.
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Main concepts used-Explained with Example….continued
For example a company grants 1000 options to an employee
on 1 October 2014 with the condition that he is entitled to apply for one share , for each option after expiry of one
year , at a price of Rs 20 per share with in period of five years from the date of vesting . ( means his entitlement )
Thus it means , that 1000 options will be vested in him after
the expiry of one year of granting of options that is on 1 October 2015.
It means he will be entitled to apply for 1000 shares ( one share for each option ) at a price of Rs 20 per share at any time during
the period of 1 October 2015 to 1 October 2019 ( exercise period of five years ) in respective of its price in the
market by paying the amount at the time of allotment .
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Main concepts used-Explained with example
1 October 2015 will be know as Vesting Date, and period from 1 October 2014 to 1 October 2015 will be known as Vesting Period .
The price of shares of Rs 20 per share will be known as Exercise Price .
The period from 1 October 2015 to 30 September 2019 will be known as Exercise Period.
The employee may apply for 500 shares on 1 October 2015 by paying Rs 10,000 at the rate of Rs 20 per share on 1 October 2015 and may apply for remaining 500 shares on 30 September 2019 (within the exercise period of five years by paying Rs 10,000 at rate of Rs 20 per share on 30 September 2019 irrespective of market price at that time that .
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Granting of Options……continued
The company may grant the a number of options to its eligible employees depending upon certain criteria like designation , period of service and performance etc .
Each option will entitle the employee to apply for one share in the company at the exercise price ( price per share) .
Exercise price is determined by the company at the time of granting of options to the employees.
The company has liberty to determine the exercise price.
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Granting of Options
The exercise may be fixed at par or at market price or at certain discount to the market price at the time of granting of options .
The company has liberty to determine the number of options to be granted to the eligible employees.
The company have to determine the maximum number of options an employee may be granted .
In case a company wish to provide more than 1% of its equity capital to an employee , then it has to take special approval from its shareholders , thus a company generally restricts its option less than 1% of its holding.
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Vesting of Options ……continued
Options granted to an employee will be
vested in him after expiry of vesting period which will be fixed at the time of granting of options .
There is a vesting period during which options cannot be exercised
Vesting period is minimum one year from the date of granting the options.
The company has liberty to determine the vesting period after which options may be exercised .
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Vesting of Options
Generally companies fix the vesting
period from one to four years from the granting date of options.
When employees leave during the vesting period options are forfeited
When employees leave after the vesting period options are exercised immediately before relieving. .
Employees are not permitted to sell/transfer options
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Exercising of Options ……continued
Options can be exercised after the vesting date that is after the expiry of vesting period .
Vesting date is the date from which the employees are entitled to exercise their options that is their right to apply for the shares at the exercise price .
Options may be exercised in one or more tranches (installments) during the exercising period .
The company may fix the minimum number of options which may be exercised in one tranche .
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Exercising of Options Exercised period is the period during which an
employee may exercise his options to subscribe the shares after the vesting date.
The company has liberty to determine the period during which options may be exercised .
Generally companies fix the exercise period from three to ten years from the vesting date.
An employee is required to make the payment of price of shares at the time of allotment.
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Points to be decided for preparing the ESOP
Maximum number of options to be
granted to an employee. To determine the exercise price . To determine the vesting period . To determine the exercising period.
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