FAQs on Indian Equity Non Fund Based

1. Definition:

As defined in SEBI (Share Based Employee Benefits) Regulations, 2014, Employees’ Stock Purchase Scheme (ESPS) is a means a scheme under which

• • • a company offers shares to employees, as part of public issue or otherwise, or
    • through a trust where the trust may undertake secondary acquisition for the purposes of the scheme.

2. Eligible Employee:

• • • Permanent employee (India or outside India).
    • Director whether Whole Time Director or not (excluding independent director).
    • An employee of a subsidiary in India or Outside India or of a holding company.

3. Ineligible Employee:

• • • An independent director.
    • Employee should neither be a promoter nor belongs to the promoter group.
    • A director who either by himself or through his relatives or through body corporate directly or indirectly holds more than 10% of the outstanding equity shares of the company cannot participate as he is not eligible to participate in the scheme.

1. As defined in SEBI (Share Based Employee Benefits) Regulations, 2014, “Employee Stock Option Scheme” means a scheme under which a company grants employee stock option directly or through a trust.

2. As defined under section 2(37) of the Companies Act, 2013: “Employee Stock Option” means the option given to directors, officers or employees of a 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 predetermined price.

3. Important Points to be noted for “Employee Stock Option”:

• • • Issue of stock option is subject to approval by shareholders through a special-resolution.
    • Minimum period of one year between grant of option and its vesting has been prescribed.
    • Operation of stock-option shall be under the superintendence and direction of a compensation committee of the Board of Directors comprising independent directors in majority.
    • Stock-option may be made available to employee of subsidiary company with the approval of shareholders.

1. Definition of “Sweat Equity Shares”: As per Section 2(83) of the Companies Act, 2013: “Sweat equity shares” means such equity shares as are issued by a company to its directors or employees at a discount or for consideration other than cash for providing their know-how or making available rights in the nature of intellectual property rights or value additions by whatever name called.

2. Governing provisions of “Sweat equity shares” divided into two parts:

• • • Companies Act, 2013 and Rules made thereunder
    • SEBI (Issue of Sweat Equity Shares) Regulations, 2002.

3. Companies Act, 2013 and Rules made thereunder: According to Section 54 of the Companies Act, 2013 a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled:

• • • Authorization by way of Special Resolution: The issue is authorized by a special resolution passed by the company in the general meeting.
    • Inclusion of information in such resolution: The resolution specifies the number of shares, current market price, consideration if any and the class or classes of directors or employees to whom such equity shares are to be issued.
    • In case of listed companies: The sweat equity shares of a company whose equity shares are listed on a recognised stock exchange are issued in accordance with the Regulations made by SEBI in this regard and if they are not listed the sweat equity shares are to be issued in accordance with Rule 8 of Companies (Share Capital and Debenture) Rules, 2014.

4. SEBI (Issue of Sweat Equity Shares) Regulations, 2002:

• • • Applicability: Listed companies which are issuing sweat equity shares are required to comply with SEBI (Issue of Sweat Equity) Regulations, 2002.
    • Non-Applicability: These regulations shall not apply to an unlisted company. However, unlisted company coming out with initial public offering and seeking listing of its securities on the stock exchange pursuant to issue of sweat equity shares, shall comply with the SEBI (ICDR) Regulations, 2018.

Issue of Sweat Equity Shares under Companies Act, 2013: According to Section 54 of the Companies Act, 2013 a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled:

• • Authorization by way of Special Resolution: The issue is authorized by a special resolution passed by the company in the general meeting.
  • Inclusion of information in such resolution: The resolution specifies the number of shares, current market price, consideration if any and the class or classes of directors or employees to whom such equity shares are to be issued.
  • In case of listed companies: The sweat equity shares of a company whose equity shares are listed on a recognised stock exchange are issued in accordance with the Regulations made by SEBI in this regard and if they are not listed the sweat equity shares are to be issued in accordance with Rule 8 of Companies (Share Capital and Debenture) Rules, 2014.

Also, the independent director of the Company are not entitled for issue of sweat equity shares of a class of shares already issued.

A Listed Company issuing bonus shares should ensure that the issue is in conformity with the provisions of Companies Act, 2013 and SEBI (ICDR) Regulations, 2018 as well as Companies Act, 2013:

• • Ensure that bonus issue has been made out of free reserves built out of the genuine profits or securities premium collected, in cash only and the reserves created by revaluation of fixed assets are not capitalised.
  • Ensure that the company has not defaulted in payment of interest or respect of fixed deposits or debt securities issued by it or in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity, bonus etc.
  • Ensure that the bonus issue is not made in lieu of dividend.
  • There should be a provision in the articles of association of the company permitting issue of bonus shares, if not steps should be taken to alter the articles suitably.
  • The share capital as increased by the proposed bonus issue should be well within the authorised capital of the company; if not, necessary steps have to be taken to increase the authorised capital.
  • Finalise the proposal and fix the date for the Board Meeting for considering the proposal and for authorising the taking up of incidental and attendant matters.
  • The date of the Board Meeting at which the proposal for bonus issue is proposed to be considered should be notified to the Stock Exchange(s) where the company’s shares are listed.
  • Hold the Board Meeting and get the proposal approved by the Board.
  • Immediately after the Board meeting intimate the Stock Exchange(s) regarding the outcome of the Meeting.
  • Ensure that the company has announced bonus issue after the approval of Board of Directors and has implemented bonus issue within fifteen days from the date of approval and must not have the option of changing the decision.

However, where the company was required to seek shareholders’ approval for capitalization of profits or reserves for making bonus issue as per the Article of Association the bonus issue has implemented within two months from the date of the meeting of the Board of Directors where in the decision to announce bonus as taken subject to shareholders’ approval.

• • Send three copies of the notice of general meeting to the Stock Exchange(s) concerned.
  • Hold the general meeting and get the resolution for issue of bonus shares passed by members. A copy of the proceedings of the meeting is to be forwarded to the concerned Stock Exchange(s).
  • Give seven days’ notice to the Stock Exchange(s) concerned before the date of book closure/record date.
  • File return of allotment with the Registrar of Companies within 30 days of allotment. Intimate Stock Exchange(s) concerned regarding the allotments made and submit an application to the Stock Exchange(s) concerned for listing the bonus shares allotted.

As per definition of “Employee” it includes:

1. A Permanent employee of the company working in India or outside of India.

2. A director of the company whether a whole time director or not but excluding an independent director.

3. An employee as defined above of a subsidiary (in India/out of India)/of a holding company of the company/of an associate company but does not include:

• • • an employee who is a promoter or belongs to the promoter group; or
    • a director who either by himself or through his relatives or through anybody corporate, directly or indirectly holds more than 10% of the outstanding equity shares of the company.

It is quite clear that all employees are not eligible to participate in ESOP/ESPS.

1. “Bonus Shares”: Bonus Shares mean the shares allotted by a company to its members free of cost by capitalizing its accumulated distributable profits.

Note: No issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets.

2. Conditions for issue of Bonus Shares: The requirements to be complied with while making Bonus Issue are given as under:

• • • As per section 63(2) of the Companies Act, 2013, no company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares unless it is authorised by its articles.
    • It has been authorized by the shareholders in a general meeting of the company, on the recommendation of the Board of Directors.
    • It has not defaulted in the payment of interest or principal in respect of fixed deposits or debt securities, if any issued by it.
    • It has not defaulted in respect of the payment of statutory dues of the employees, such as contribution to provident fund, gratuity and bonus.
    • The partly paid up shares if any outstanding on the date of allotment have been made fully paid up.
    • No Bonus Shares in lieu of dividend:

As per Section 63(3) of Companies Act, 2013, the bonus shares shall not be issued in lieu of dividend.

According to Rule 14 of Companies (Share Capital and Debentures) Rules, 2014 states that the company which has once announced the decision of its Board recommending a bonus issue shall not subsequently withdraw the same.

• • As the reserve created by revaluation of fixed assets should not be capitalised. These reserves are “capital reserves”. However, if the assets are subsequently sold and the profits are realised such profits could be utilised for capitalisation purposes.
  • Thus, the given statement is correct that “for the purpose of issue of bonus shares, the reserves created by revaluation of fixed assets shall not be capitalised”.

Situation 1: Stock split post Bonus Issue:

Situation 2: Stock Split before Bonus Issue:

Therefore, we can say that there would be no change in the situation if the stock split taken place before issue of bonus shares

Following are the steps involved in issue of Bonus Shares:

1. 1. Ensure that bonus issue has been made out of free reserves built out of the genuine profits or securities premium collected in cash only.
   2. Ensure that reserves created by revaluation of fixed assets are not capitalized.
   3. Ensure that the company has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it or in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity, bonus etc.
   4. Ensure that the bonus issue is not made in lieu of dividend.
   5. There should be a provision in the articles of association of the company permitting issue of bonus shares; if not, steps should be taken to alter the articles suitably.
   6. The share capital as increased by the proposed bonus issue should be well within the authorised capital of the company; if not, necessary steps have to be taken to increase the authorised capital.
   7. Finalise the proposal and fix the date for the Board Meeting for considering the proposal and for authorizing the taking up of incidental and attendant matters.
   8. The date of the Board Meeting at which the proposal for bonus issue is proposed to be considered should be notified to the Stock Exchange(s) where the company’s shares are listed.
   9. If there are any partly paid-up shares, ensure that these are made fully paid-up before the bonus issue is recommended by the Board of directors.
   10. Hold the Board Meeting and get the proposal approved by the Board of directors.
   11. The resolution to be passed at the General Meeting should also be approved by the Board of Directors in its meeting. The intention of the Board of directors regarding the rate of dividend to be declared in the year after the bonus issue should be indicated in the resolution for bonus issue to be passed by members in general meeting.
   12. Immediately after the Board meeting intimate the Stock Exchange(s) regarding the outcome of the Meeting.
   13. Hold the general meeting and get the resolution for issue of bonus shares passed by the members. A copy of the proceedings of the meeting is to be forwarded to the concerned Stock Exchange(s).
   14. Give seven days’ notice to the Stock Exchange(s) concerned before the date of book closure/record date.
   15. File return of allotment with the Registrar of Companies within 30 days of allotment (Section 39 of the Companies Act, 2013). Also intimate Stock Exchange(s) concerned regarding the allotments made.
   16. Ensure that the allotment is made within fifteen days of the date on which the Board of directors approved the bonus issue. Also, submit an application to the Stock Exchange(s) concerned for listing the bonus shares allotted.

The requirements to be complied with while making Bonus Issue are given as under:

• • As per Section 63(2) of the Companies Act, 2013, no company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares unless it is authorised by its articles.
  • It has been authorized by the shareholders in a general meeting of the company, on the recommendation of the Board of Directors.
  • It has not defaulted in the payment of interest or principal in respect of fixed deposits or debt securities, if any issued by it.
  • It has not defaulted in respect of the payment of statutory dues of the employees, such as contribution to provident fund, gratuity and bonus.
  • The partly paid up shares if any outstanding on the date of allotment have been made fully paid up.
  • No Bonus Shares in lieu of dividend:

As per Section 63(3) of Companies Act, 2013, the bonus shares shall not be issued in lieu of dividend.

According to Rule 14 of Companies (Share Capital and Debentures) Rules, 2014 states that the company which has once announced the decision of its Board recommending a bonus issue shall not subsequently withdraw the same.

Therefore, in the given case the company has complied with all the conditions required to be satisfied that the court was correct in awarding the judgment in favour of the company.

Following are the advantages of Bonus Issue:

• • Market value of the Company’s shares comes down to their nominal value by issue of bonus shares.
  • Market value of the members’ shareholdings increases with the increase in number of shares in the company.
  • The paid-up share capital increases.
  • Bonus shares not considered as an income. Thus, not a taxable income.
  • Fund flow not adversely affected.

1. Applicability of SEBI (Share Based Employee Benefits) Regulations, 2014: The provisions of these regulations shall apply to following:

• • • Employee Stock Option Schemes.
    • Employee Stock Purchase Schemes.
    • Stock Appreciation Rights Schemes.
    • General Employee Benefits Schemes.
    • Retirement Benefit Schemes.

2. Non-applicability of SEBI (Share Based Employee Benefits) Regulations, 2014:

• • • It shall not apply to shares issued to employees in compliance with the provisions pertaining to preferential allotment as specified in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
    • The provisions pertaining to preferential allotment as specified in SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 shall not be applicable in case of a company issuing new shares in pursuance and compliance of these regulations.

Procedure for issuing ESOP by a Listed Company:

Following are the steps to be followed for the purpose of issuing ESOP by Listed Company:

• • Hold a Board Meeting to consider and approve ESOP and formation of Compensation Committee.
  • Compensation committee shall plan draft the scheme of ESOP.
  • Board Meeting: Hold Board meeting to adopt the final scheme, appoint the Merchant banker and approve the notice of the General meeting for shareholders’ approval.
  • General Meeting: Hold General Meeting for approval of shareholders.
  • Application to Stock Exchange: Make an application to the stock exchange for obtaining in-principal approval of the stock exchange.
  • Letter of grant of Option to eligible employees: Issue of letter of grant of option to the eligible employees along with the letter of acceptance of option.
  • Issue of Option Certificates: On receipt of letter of acceptance of option along with upfront payment (if any) from the employee issue the option certificates.
  • Issue of Letter of Vesting: After expiry of vesting period not less than one year the options shall vest in the employee. At that time, the Company shall issue a letter of vesting along with the letter of exercise of options.
  • Receipt of Letter of Exercise from Employee: Receipt to letter of exercise from the employee.
  • Board meeting during exercise period: Hold a Board Meeting at the suitable Interval during the exercise period for allotment of shares on options exercised by the options.
  • Dispatching Letter of Allotment: Dispatch of letter of allotment along with the share certificates or credit the shares so allotted with the Depositories.
  • Make application to Stock Exchange: Make an application to the Stock exchange for listing of the Shares so allotted.
  • Receipt of Listing: Receipt of Listing of the shares from the Stock exchange.