Quick guide on ESOP Policy

Q. What is an ESOP Policy?

ESOP policy is a policy formulated by a company at any stage while issuing ESOPs to their employees. The company can formally give out any ESOPs in the form of grant letters. Every company has a freedom to determine the exercise price. Terms and conditions mentioned in the Companies Act, 2013 (“Act”) along with the Companies (Share Capital and Debentures) Rules, 2014 (“Rules”) are to be looked into while framing an ESOP policy.

Q. What are the important clauses to be included while drafting an ESOP Policy?

While drafting an ESOP policy certain clauses are mandatory to be included in the policy which will affect the framework of the same. ESOP policy must be drafted looking into terms and conditions of the Act and Rules along with keeping in mind the rights and liabilities of the employers and employees.

Following clauses are to be included while drafting an ESOP policy:
  1. Regulatory Guideline governing issue of ESOPs i.e. Securities And Exchange Board Of India (Employee Stock Option Scheme And Employee Stock Purchase Scheme) Guidelines, 1999;
  2. There are class of employees who are eligible for receiving ESOPs. The employees falling under the eligibility criteria for class of employees are allotted ESOPs;
  3. A Compensation Committee for administration and superintendence of the ESOPs has to be constituted as per the requirements under the abovementioned Rules;
  4. ESOP Policy should specify the requirements of vesting period, lock-in period, exercise price of ESOPs;
  5. ESOP policy must also state the methods used by the company to value its options, condition of lapsing and consequences of failure to exercise the option;

Q. Disclosures to be made while issuing an ESOP Policy?

As per Companies Act, 2013 issuing of ESOPs requires passing of special resolution. A notice of special resolution requires disclosures in explanatory statements. These explanatory statements are attached to the notice of special resolution. Hence, all such disclosures are to be made while sending notices for issuing of ESOPs.

Conclusion:

ESOPs are good way to encourage employees and motivate them into working hard towards the company. Companies have freedom to draft their own policy which helps them issue ESOP as per their convenience and for betterment of the company. Hence, basic clauses are to be looked into before drafting the policy.

The content of this article is intended to provide general guidance on the subject matter. Specialist advice should be sought about your specific circumstances.

Key words: ESOP, Lock-in period, Exercise period.

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