I.

Provisions of ESOP in Companies Act:

Section 61 of the Companies Act 2013 provides, Power of limited company to alter its share
capital
(1) A limited company having a share capital may, if so authorized by its articles,
alter its memorandum in its general meeting to—
(a) increase its authorized share capital by such amount as it thinks expedient;
(b) consolidate and divide all or any of its share capital into shares of a larger
amount than its existing shares:
Provided that no consolidation and division which results in changes in the
voting percentage of shareholders shall take effect unless it is approved by the Tribunal
on an application made in the prescribed manner;
(c) convert all or any of its fully paid-up shares into stock, and reconvert that
stock into fully paid-up shares of any denomination;
(d) sub-divide its shares, or any of them, into shares of smaller amount than is
fixed by the memorandum, so, however, that in the sub-division the proportion between
the amount paid and the amount, if any, unpaid on each reduced share shall be the
same as it was in the case of the share from which the reduced share is derived;
(e) cancel shares which, at the date of the passing of the resolution in that
behalf, have not been taken or agreed to be taken by any person, and diminish the
amount of its share capital by the amount of the shares so cancelled.
(2) The cancellation of shares under sub-section (1) shall not be deemed to be a
reduction of share capital.

Section 62(1)(b) of the Companies Act, 2013 provides that where at any time, a company having
a share capital proposes to increase its subscribed capital by the issue of further shares, such
shares may be offered to employees under a scheme of employees’ stock option, subject to
special resolution (ordinary resolution in case of private company) passed by company and
subject to such conditions as may be prescribed.

II. Provisions of ESOP in Companies (Share Capital and Debentures) Rule:

12. Issue of employee stock options. -

A company, other than a listed company, which is not required to comply with Securities and
Exchange Board of India Employee Stock Option Scheme Guidelines shall not offer shares to
its employees under a scheme of employees’ stock option (hereinafter referred to as
“Employees Stock Option Scheme”), unless it complies with the following requirements, namely:

(1) the issue of Employees Stock Option Scheme has been approved by the shareholders of the
company by passing a special resolution.
Explanation: For the purposes of clause (b) of sub-section (1) of section 62 and this rule
‘‘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 as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a
holding company of the company but does not include-

(i) an employee who is a promoter or a person belonging to the promoter group; or

(ii) a director who either himself or through his relative or through anybody corporate, directly or
indirectly, holds more than ten percent of the outstanding equity shares of the company.

Provided that in case of a startup company, as defined in notification number GSR 180(E) dated
17th February,2016 issued by the Department of Industrial Policy and Promotion, Ministry of
Commerce and Industry Government of India, Government of India, the conditions mentioned in
sub-clause (i) and (ii) shall not apply upto five years from the date of its incorporation or
registration.

(2) The company shall make the following disclosures in the explanatory statement
annexed to the notice for passing of the resolution-

(a) the total number of stock options to be granted;

(b) identification of classes of employees entitled to participate in the Employees Stock

(c) the appraisal process for determining the eligibility of employees to the Employees
Stock Option Scheme;

(d) the requirements of vesting and period of vesting;

(e) the maximum period within which the options shall be vested;

(f) the exercise price or the formula for arriving at the same;

(g) the exercise period and process of exercise;

(h) the Lock-in period, if any;

(i) the maximum number of options to be granted per employee and in aggregate;
(j) the method which the company shall use to value its options;

(k) the conditions under which option vested in employees may lapse e.g. in case of termination
of employment for misconduct;

(l) the specified time period within which the employee shall exercise the vested options in
the event of a proposed termination of employment or resignation of employee; and

(m) a statement to the effect that the company shall comply with the applicable
accounting standards.

(3) The companies granting option to its employees pursuant to Employees Stock Option
Scheme will have the freedom to determine the exercise price in conformity with the applicable
accounting policies, if any.

(4) The approval of shareholders by way of separate resolution shall be obtained by the
company in case of-

(a) grant of option to employees of subsidiary or holding company; or

(b) grant of option to identified employees, during any one year, equal to or exceeding one
percent of the issued capital (excluding outstanding warrants and conversions) of the company
at the time of grant of option.

(5) (a) The company may by special resolution, vary the terms of Employees Stock Option
Scheme not yet exercised by the employees provided such variation is not prejudicial to the
interests of the option holders.

(b) The notice for passing special resolution for variation of terms of Employees Stock Option
Scheme shall disclose full of the variation, the rationale therefor, and the details of the
employees who are beneficiaries of such variation.

(6)(a) There shall be a minimum period of one year between the grant of options and vesting of
option:

Provided that in a case where options are granted by a company under its Employees Stock
Option Scheme in lieu of options held by the same person under an Employees Stock Option
Scheme in another company, which has merged or amalgamated with the first mentioned
company, the period during which the options granted by the merging or amalgamating
company were held by him shall be adjusted against the minimum vesting period required under
this clause;

(b) The company shall have the freedom to specify the lock-in period for the shares issued
pursuant to exercise of option.
(c) The Employees shall not have right to receive any dividend or to vote or in any manner enjoy
the benefits of a shareholder in respect of option granted to them, till shares are issued on
exercise of option.

(7) The amount, if any, payable by the employees, at the time of grant of option-

(a) may be forfeited by the company if the option is not exercised by the employees within
the exercise period; or

(b) the amount may be refunded to the employees if the options are not vested due to non-
fulfillment of conditions relating to vesting of option as per the Employees Stock Option Scheme.

(8) (a) The option granted to employees shall not be transferable to any other person.

(b) The option granted to the employees shall not be pledged, hypothecated, mortgaged or
otherwise encumbered or alienated in any other manner.

(c) Subject to clause (d), no person other than the employees to whom the option is granted
shall be entitled to exercise the option.

(d) In the event of the death of employee while in employment, all the options granted to him till
such date shall vest in the legal heirs or nominees of the deceased employee.

(e) In case the employee suffers a permanent incapacity while in employment, all the options
granted to him as on the date of permanent incapacitation, shall vest in him on that day.

(f) In the event of resignation or termination of employment, all options not vested in the
employee as on that day shall expire. However, the employee can exercise the options granted
to him which are vested within the period specified in this behalf, subject to the terms and
conditions under the scheme granting such options as approved by the Board.

(9) The Board of directors, shall, inter alia, disclose in the Directors’ Report for the year, the
following details of the Employees Stock Option Scheme:

(a) options granted;

(b) options vested;

(c) options exercised;

(d) the total number of shares arising as a result of exercise of option;

(e) options lapsed;

(f) the exercise price;

(h) money realized by exercise of options;

(i) total number of options in force;

(j) employee wise details of options granted to; -

(i) key managerial personnel;

(ii) any other employee who receives a grant of options in any one year of option amounting to
five percent or more of options granted during that year.

(iii) identified employees who were granted option, during any one year, equal to or
exceeding one percent of the issued capital (excluding outstanding warrants and conversions)
of the company at the time of grant;

(10) (a) The company shall maintain a Register of Employee Stock Options in Form No.
SH.6and shall forthwith enter therein the particulars of option granted under clause (b) of sub-
section (1) of section 62.

(b) The Register of Employee Stock Options shall be maintained at the registered office of the
company or such other place as the Board may decide.

(c) The entries in the register shall be authenticated by the company secretary of the company
or by any other person authorized by the Board for the purpose.

(11) Where the equity shares of the company are listed on a recognized stock exchange, the
Employees Stock Option Scheme shall be issued, in accordance with the regulations made by
the Securities and Exchange Board of India in this behalf.

III. Procedure for issue of ESOP in Private Limited Companies:

A Private Limited Company can issue ESOP subject to the limitation of the maximum number of
shareholders. If the number of shareholders after allotment of share under ESOP exceed the
maximum number of shareholders for the private limited company, then the private company
must be converted to the public limited company before the issue of such shares. If the total
shareholders after allotment of share in the ESOP scheme reach 200 or more then the company
shall convert itself to the public limited company.
If AOA is salient on the issue of share to employees under the scheme of ESOP, then article
shall be amended, also if the MOA does not have the adequate authorized share capital then
MOA shall also be amended.

Procedure to amend the memorandum and article of the company and approval of the ESOP
scheme:
  Draft the new Memorandum of Association (MOA) and the Article of Association (AOA)

 Draft the ESOP scheme.

 Draft the resolution to be passed in the board meeting.

 Draft the resolution to be passed in the EGM (extraordinary general meeting).

 Draft the Notice of the EGM.

 Send the notice of the meeting to all the directors (There is no time limit in the law to
send the notice of the board meeting. However as per the secretarial Standard-1 on
board meeting notice should be given at least 7 days prior to the board meeting.)

Hold the meeting of the board of director of the company and following action shall be
taken in the board meeting:

1. Approve the drafted MOA and AOA by passing the resolution in the meeting.
2. Approve the ESOP Scheme.
3. Approve/finalize the time and place of EGM.
4. Approve/finalize the notice of EGM.

5. Prepare the Minute of the board meeting.