Can ESOPs be issued to the Promoters and Directors under the New Companies Act, 2013? What are the restrictions in terms of percentage?
Section 2(37) of the new Companies Act defines employees’ stock option means (ESOP) as-
“The option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price.”
Therefore, from the words used to define ESOP, it is very clear that directors can be entitled to ESOP.
As per clause 2A of SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 “employee stock option” has been defined as-
“the option given to the whole-time Directors, Officers or employees of a company which gives such Directors, Officers or employees, the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price.”
It is to be noted that the above definition also does not use the word ‘promoter’ but only ‘directors’, ‘officers’, and ‘employees’. Most importantly, as per Clause 4.1 of the aforementioned SEBI Guidelines- “an employee who is a promoter or belongs to the promoter group shall not be eligible to participate in the ESOS.” It is to be noted that clause 4.1 of the above Guidelines will be applicable only on the listed companies. A company, other than a listed company, which is not required to comply with the above SEBI Guidelines, cannot offer shares to its employees under a scheme of employees’ stock option unless it complies with the requirements mentioned in Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.
Furthermore, as per Section 62(1)(b) of the new Act, where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares can be offered to employees under a scheme of employees’ stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed. For the purpose of clause (b) of sub-section (1) of section 62 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, ‘‘Employee’’ means–
- a permanent employee of the company who has been working in India or outside India; or
- a director of the company, whether a whole time director or not but excluding an independent director; or
- 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 or of an associate company but does not include-
- an employee who is a promoter or a person belonging to the promoter group; or
- a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.
Thus it is clear that a promoter of a company cannot avail the ESOP benefits. As regards the limit or restriction on issuance of ESOP, Rule 12 is completely silent about it and only provides that-
“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.”
Thus, there appears to be no restrictions in terms of any specific percentage on the issuance of ESOP.
 Explanation to Rule 12(1) of the Companies (Share Capital and Debentures) Rules, 2014