S.G.N Presentation by: CS ANUP KUMAR SHARMA VICE PRESIDENT VC CORPORATE ADVISORS PVT. LTD. (Category I) MERCHANT BANKERS
Equity as Compensation • Equity as an asset class is a time tested tool that provides one of the best opportunities for wealth creations • Equity as a mode of compensation is cost effective for employer • Sense of ownership, particularly at a senior level
What it does • Market pays, not the company from its cash kitty • Attraction and retention of talent for positions of substantial responsibility • Creates commonality of interest betweenemployees and shareholders • Provides great incentive and motivation to employees • Offers most tax efficient compensation for employees
Who is an employee? a) A permanent employee of the company working in India or out of India; or b) a director of the company, whether a whole time director or not ;or c) an employee as defined in abovey, in India or outof India, or of a holding company of the company.
What is employee compensation? It is the total cost incurred by the company towards employee compensation including basic salary, dearness allowance, other allowances, bonus and commissions including the value of all perquisites provided but does not include: • the fair value of the option granted under an Employee Stock Option Scheme; & b) the discount at which shares are issued under Employee Stock Purchase Scheme.
Who is eligible to participate in ESOS? • >>>>An employee shall be eligible to participate in ESOS of the company • >>>> An employee who is a promoter or belongs to the promoter group shall not be eligible to participate in the ESOS. • >>>>A director who either by himself or through his relative or through any body corporate , directly or indirectly holds more than 10% of the outstanding equity shares of the company shall not be eligible to participate in the ESOS
Salient Feature of ESOP • An option is given to employees to acquire equity shares (or other convertible securities) in the company after a future date but the price is fixed in advance; • The employee has the choice to decide whether to acquire the shares/convertible securities or not; • In case the employee opts for the shares, he has to exercise an option and pay the agreed price; • After the lock-in period (if any) the employee can sell the shares in the market and realize the gain; • The employees holding stock options do not have the right to receive dividend or vote or enjoy any other privileges of a shareholder till the shares are actually issued on exercise of option, after the completion of vesting period; • The options granted to the employees are not transferrable to any other person. The option granted to the employee cannot be pledged, hypothecated, mortgaged or otherwise alienated in any other manner
Various Stages in The ESOP Process • Grant – it means issue of stock options to employees under ESOP. The employees may be required to pay an upfront amount at time of grant of options, depending upon the provisions of the scheme framed by the company. The said amount is adjusted when the shares are allotted on exercise of option. • Vesting- Vesting means the process by which the employee gets the right to apply for and be issued shares of the company under the options granted to him. Till the vesting takes place, the employee does not have right to apply for the company’s shares. Upon vesting, the employee gets an unfettered right to apply for the issue of shares. • Vesting Period- it means the period during which the vesting of the options granted to an employee takes place. The SEBI guidelines provide that the vesting period shall not be less than one year from the date of grant of options.
Various Stages in The ESOP Process • Vesting percentage- it refers to that portion of the total options granted, which an employee is eligible to exercise. In other words, vesting of the entire lot of options granted can take place either in one stokes at the completion of a fixed period or it can be staggered or phased vesting. • Exercise period- it means the time period after vesting within which the employee should exercise his right to apply for the shares, otherwise the vested options would lapse. This period starts from the date of vesting of options. • Exercise- it means making of an application to the company by an employee together with the requisite amount, for issue of shares against the options already vested
ESOP Administration • Must constitute a Compensation Committee (CC) of the Board –to consist of majority independent Directors • Prescribed particulars must be disclosed to prospective Option grantee • CC responsible for framing policies and systems to ensure compliance with Insider Trading and Fraudulent and Unfair Trade Practices in Securities Market Regulations • CC shall formulate terms and conditions including: - quantum of Options to be granted per employee and in the aggregate - conditions under which vested Options may lapse upon termination or misconduct - exercise period both during employment and after termination - mode of exercise: all at one time or in installments - procedure for cashless excercise
ESOP Procedural – Flowchart intimating allotment to Concerned Employee Convey allotment to CC Drafting of ESOP Scheme Hold BM for allotment of Shares Entry into Register of Members Consideration of ESOP Scheme by Board & proposing constitution of ‘Compensation Committee’ (CC) Employees exercising options – forwdngapplication to CC Reporting to: ROC RBI, if applicable Consideration of ESOP Scheme in EGM & authorisation for Constitution of CC. Communicate – Vesting period Acceptance of Grant Meeting of CC - determination of eligibility criteria, exercise price, vesting Period, exercise period etc. Communicate – Grant of options to Employees
Employee Stock Purchase Scheme Employee Stock Purchase Scheme (ESPS) means a scheme under which the company offers shares to employees as part of a public issue or otherwise. .
Shareholders Approval • Special resolution to be passed in General Body meeting • Notice shall specify: Price of shares No of shares offered Eligibility No of shares to be issued
Pricing and Lock-in • Shares issued under ESPS shall be locked in for a minimum period of one year from the date of allotment • If ESPS is part of public issue and if shares issued at same price to employees there is no lock in required • Company has a freedom to determine price of shares to be issued under ESPS provided they Conform to the provision laid down by company law
ADVANTAGES, DISADVANTAGES & LIMITATION OF ESOP • Advantages • Awareness of company success • Employee commitment and satisfaction • Spurs change • Heightened decision making • Encourages reengineering Disadvantages • Stock markets are highly volatile • ESOP can increase the financial risk of employees in case they over-invest in their company • The difference between the ‘fair value’ and the discounted ‘exercise price’ has to be treated as employee compensation and as such the same has to be debited to the profit and loss account of the company • In case the ESOP scheme has a lock-in-period after allotment of shares, then it leads to blocking of funds. • ESOP leads to dilution in the shareholding percentage of other shareholders including the promoter group.
When are they taxed? • The ESOP is not taxed on acquiring the shares. • You are taxed on the profit you make when you sell the shares or transfer them. • Transfer here refers to when you gift it to someone or transfer it to someone else under an irrevocable deed (they now own it, not you).
FBT on ESOPshas been abolished ESOPs have been included in the purview of Perquisites under Section 17 (2). The value of the ESOPs determined on the date of exercise, as the difference between the fair market value of the shares as on the date of exercise and the exercise price, would be taxable as a perquisite in the hands of the employees. • In section 17 (2) of Income-tax Act, the following sub-clauses are being substituted for clause • (vi) with effect from the 1st • day of April, 2010 .
The taxability depends on the nature of gain at the time of sale. • If you have a short-term capital gain, you have to pay tax at the rate of 10% (plus surcharge if applicable). • Long-term gains are exempt from tax. What if they are listed and sold in India?
This depends on whether you are a resident or non-resident Indian. • If you are a non-resident, it will not be taxable, as the gains occur outside India , unless the money is received in India. • If you are a resident in India, then you will be taxed on the gains. • Long-term capital gain is taxed at 20%. • Short-term capital gain is added to your overall income and taxed according to your slab rate What if they are listed abroad and sold abroad?
If you sell your shares on or after October 1, 2004, you need to pay the Securities Transaction Tax in India. • Also the STT is leviable in abroad as per their rules. Do I have to pay a security transaction tax if sold in India or abroad?
ESOP Under the ESOP plan, companies provide their employeesthe opportunity to acquire the company's shares at a reduced priceover a period of time. • I • Infosys has given stock options worth Rs 50,000 crore till now
BUY BACK OF SHARES
Meaning of Buy Back of Shares There is no definition given by the Company Act, 1956 about the buy back of shares. But in simple words, we can say that buy back of shares means repurchase of its own shares by the company. In other words, buy back of shares means a company buying its own shares Buyback is reverse of issue of shares by a company where it offers to take back its shares owned by the investors at a specified price; this offer can be binding or optional to the investors It was opted by company if there was an addition funds with company and there is no profitable application where these funds can be invested.
Objective of Buy Back of Shares Shares may be bought back by the company on account of one or more of the following reasons • To increase promoters holding. • Increase earning per share. • To maintain a target capital structure. • Support share value. • To prevent takeover. • To pay surplus cash not required by business.
The provisions regulating buy back of shares are contained in Section 77A, 77AA and 77B of the Companies Act, 1956. SECTION These were inserted by the Companies (Amendment) Act,1999.
The Securities and Exchange Board of India (SEBI) framed the SEBI (Buy Back of Securities) Regulations, 1999 and the Department of Company Affairs framed the Private Limited Company and Unlisted Public company (Buy Back of Securities) rules, 1999. SEBI
Resources Of Buy Back • Free reserves • The securities premium account • The proceeds of any shares or other specified securities.
Conditions Of Buy Back • The articles should permit buyback. • A special resolution should be passed in general meeting of the company authorizing buyback. • The buyback should be equal to or less than 25% of the total paid up capital and free reserves of the company.
All the shares for buy back should be fully paid up. • Buy Back should be in Accordance with the SEBI Regulations • The ratio of debt owned by the company should not be more than twice the capital and its free reserves, in that particular financial year.
Before making purchases under buy back , a declaration of solvency in the prescribed form has to be filed with the ROC. • Affidavit has to be submitted. • Declaration should be signed by atleast two directors of the company.
Prohibition from further issue of securities within a period of two years. • The securities should be extinguished and physically destroyed within seven days of the last date of completion of buy back. • Maintaining a register of securities – the consideration paid , the date of extinguishing and physically destroying of securities etc. • Any default to comply with the requirements /rules is punishable
Prohibition of Buy Back • Through any/own subsidiary company • Through any investment company or a group of investment companies. • If the company has defaulted in respect of repayment.
SEBI Buy-Back of Securities by Listed Companies Regulation, 1998 A company can buy back its own securities by one of the following methods From the existing shareholders on a proportionate basis through tender offer. From Open Market From odd Lot holder
To buy back securities, a company should be authorized by • Special Resolution under Section 77-A(2) of the companies Act • A resolution passed by its Board of Directors under Section 77-A(2)(b)(i).
Release of the Public Announcement (Regulation 8) • Filling of Offer Document. • Dispatch of letter of offer to security holders.
Contents of Explanatory Statement • The date of the meeting at which the proposal for buy-back was approved by the Board of Directors of the company. • The necessity of Buy-back. • The maximum amount required under the Buyback and the sources of funds from which the buy-back would be financed. • The basis of arriving at the buy-back price. • The number of securities that the company proposes to buy-back.
7. a) The aggregate security holding of the promoter and of the director of the promoter. b) Aggregate number of equity purchased or sold by people. 8. A confirmation that there are no defaults in repayment of deposits, redemption of debentures or pref shares or repayment of term loans to any financial institution(s) or bank(s). 9.A report addressed to the board of Directors by the company's auditor.