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Companies Act 1956
Under Indian law, a private company is governed by the Companies Act, 1956 and any Rules or Regulations formulated by the Central Government. At present, the Companies Act 1956 doesn't provide any rule or regulation specifically governing the ESOP scheme. In case any public company opts for the scheme then it shall be treated as general increase of share capital and shall be governed by the relevant provisions of Act the and the Articles of Associations of the Company.
Following provisions of the Companies Act 1956 shall apply, when a company proposes to implement ESOP Scheme:
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Section 77 - Restrictions on purchase by company , or loans by company or purchase, of its own or its holding company's shares
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Under some ESOP Schemes, compnaies also finances the purchase of shares by the employees of the Company by providing them necessary loan. Though the Companies Act 1956 prohibits the purchase of its owns shares by the Company but section 77 of the Companies Act 1956 provides some exception , under which the company can provides financial assistance for the purchase of its own shares.
As per one of exception to section 77, a company can provide loan to persons (other than directors or managers) who are in bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for fully paid shares in the company or its holding company to be held by themselves by way of beneficial ownership.
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The text of section has been outlined below
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1) No company limited by shares, and no company limited by guarantee and having a share capital, shall have power to buy its own shares, unless the consequent reduction of capital is effected and sanctioned in pursuance of sections 100 to 104 or of section 402.
(2) No public company, and no private company which is a subsidiary of a public company, shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or in its holding company: Provided that nothing in this sub-section shall be taken to prohibit-
(a) the lending of money by a banking company in the ordinary course of its business; or
(b) the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fully paid shares in the company or its holding company, being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees of the company, including any director holding a salaried office or employment in the company; or
(c) the making by a company of loans, within the limit laid down in sub- section (3), to persons (other than directors or managers) bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for fully paid shares in the company or its holding company to be held by themselves by way of beneficial ownership.
(3) No loan made to any person in pursuance of clause (c) of the foregoing proviso shall exceed in amount his salary or wages at that time for a period of six months.
(4)1f a company acts in contravention of sub-sections(1) to (3), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to ten thousand rupees.
(5) Nothing in this section shall affect the right of a company to redeem any shares issued under section 80 or under any corresponding provision in any previous companies law.
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Section 81
- Issue of Further Shares
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A public company issuing equity shares at any time after the expiry of two years the formation of a Company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, is required to comply with the provisions of this section.
Whenever the expiry of the aforesaid time , the company intends to allot shares to person other than existing shareholders, than it is required to take their approval for the same.
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The text of section has been outlined below:
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(1) [Where at any time after the expiry of two years the formation of a Company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, then,-]
(a) such [further]shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the Company, in proportion, as nearly as circumstances admit, to the capital paid-up on those shares at that date;
(b) the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been decided;
(c) unless the articles of the Company other wise provide, the offer aforesaid shall be deemed to include a right exercise by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (b) shall contain a statement of this right;
(d) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier limitation from the person to whom such notice is given that he declines to accept the shares offered, the Board of directors may dispose of them in such manner as they think most beneficial to the Company.
Explanation.--- In this sub-section, "equity share capital" and "equity shares" have the same meaning as in section 85.
[(1A) Notwithstanding anything contained in sub-section ( 1), the further shares aforesaid may be offered to any persons [whether or not those persons include the persons referred to in clause (a) of sub-section (1)] in any manner whatsoever-
(a) if a special resolution to that effect is passed by the company in general meeting, or
(b) where no such special resolution is passed, if the votes cast (whether on a show of hands, or on a poll, as the case may be) in favour of the proposal contained in the resolution moved in that general meeting (including the casting vote, if any, of the chairman) by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, exceed the votes, if any, cast against the proposal by members so entitled and voting and the Central Government is satisfied, on an application made by the Board of directors in this behalf, that the proposal is most beneficial to the company.]
(2) Nothing in clause (c) of sub-section (1) shall be deemed-
(a) to extend the time within which the offer should be accepted, or
(b) to authorise any person to exercise the right of renunciation for a second time, on the ground that the person in whose favour the renunciation was first made has declined to take the shares comprised in the renunciation.
(3) Nothing in this section shall apply-
(a) to a private company; or
(b) to the increase of the subscribed capital of a public company caused by the exercise of an option attached to debentures issued or loans raised by the company-
(i) to convert such debentures or loans into shares in the company, or
(ii) to subscribe for shares in the company.
[Provided that the terms of issue of such debentures or the terms of such loans include a term providing for such option and such term-
(a) either has been approved by the Central Government before the issue of debentures or the raising of the loans, or is in conformity with the rules, if any, made by that Government in this behalf; and
(b) in the case of debentures or loans other than debentures issued to, or loans obtained from, the Government or any institution specified by the Central Government in this behalf, has also been approved by a Special resolution passed by the company in general meeting before the issue of the debentures or the raising of the loans].
[(4) Not withstanding anything contained in the foregoing provisions of this section, where any debenture have been issued to, or loans have been obtained from, the Government by a company, whether such debentures have been issued or, loans have been obtained before or after the commencement of the Companies (Amendment ) Act, 1963, the Central Government may if in its opinion it is necessary in the public interest so to do, by order direct that such debenture or loan or any part thereof shall be converted into shares in the company on such terms and conditions as appear to that Government to be reasonable in the circumstances of the case, even if the terms of issue of such debenture or the terms of such loans do not include a term providing for an option for such conversion.
(5) In determining the terms and conditions of such conversion, the Central Government shall have due regard to the following circumstances, that is say, the financial position of the company, the terms of issue of the debentures or the terms of the loans, as the case may be, the rate of interest payable on the debentures or the loans, the capital of the company, its loan liabilities, its reserves, its profits during the preceding five years and the current market price of the shares in the company.
(6) A copy of every order proposed to be issued by the Central Government under sub-section(4) shall be laid in draft before each House of Parliament while it is in session for a total period of thirty days which may be comprised in one session or in two or more successive sessions.
(7) If the terms and conditions of such conversion are not acceptable to the company, the company may, within thirty days from the date of communication to it of such order or within such further time as may be granted by the Court, prefer an appeal to the Court in regard to such terms and conditions and the decision of the Court on such appeal and, subject only to such decision, the order of the Central Government under sub-section(4) shall be final and conclusive.]
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Section 75
- Return of Allotment |
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Every Company allotting any equity shares is required to file the Return of Allotment with the Registrar of Companies, within 30 days of the allotment.
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The text of section has been outlined below:
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(1) Whenever a company having a share capital makes any allotment of its shares, the company shall, within [thirty days] thereafter,-
(a) file with the Registrar a return of the allotments', stating the number and nominal amount of the shares comprised in the allotment, the names, addresses and occupations of the allottees, and the amount, if any, paid or due and payable on each share :
[Provided that the company shall not show in such return any shares as having been allotted for cash if cash has not actually been received in respect of such allotment;]
(b) in the case of shares (not being bonus shares) allotted as fully or partly paid-up otherwise than in cash, produce for the inspection and examination of the Registrar a contract in writing constituting the title of the allotted to the allotment together with any contract of sale, or a contract for services or other consideration in respect of which that allotment was made, such contracts being duly stamped, and file with the Registrar copies verified in the prescribed manner of all such contracts and a return stating the number and nominal amount of shares so allotted, the extent to which they are to be treated as paid- up, and the consideration for which they have been allotted; and
(c) file with the Registrar-
(i) in the case of bonus shares, a return stating the number and nominal amount of such shares comprised in the allotment and the names, addresses and occupations of the aIlottees and a copy of the resolution authorising the issue of such shares;
(ii) in the case of issue of shares at a discount, a copy of the resolution passed by the company authorising such issue together with a copy of the order of the Court sanctioning the issue and where the maximum rate of discount exceeds ten per cent, a copy of the order of the Central Government permitting the issue at the higher percentage.]
(2) Where a contract such as is mentioned in clause (b) of sub-section (1) is not reduced to writing, the company shall, within "[thirty days] after the allotment, file with the Registrar the prescribed particulars of the contract stamped with the same stamp duty as would have been payable if the contract had been reduced to writing; and those particulars shall be deemed to be an instrument within the meaning of the Indian Stamp Act, 1899(2 of t899), and the Registrar may ,as a condition of filing the particulars, require that the duty payable thereon be adjudicated under section 3 t of that Act.
(3) If the Registrar is satisfied that in the circumstances of any particular case the period of "[thirty days] specified in sub-sections (1) and (2) for compliance with the requirement" of this section is or was inadequate, he may, on application made in that behalf by the company, whether before or after the expiry of the ,said period, extend that period as he thinks fit]; and if he does, the provision of sub-sections (1) and (2) ,shall have effect in that particular case as if for the said period of [thirty days, the extended period allowed by the Registrar were ,substituted.
(4) If default is made in complying with this section, every officer of the company who is in default shall be punishable with fine which may extend to five thousand rupees for every day during which the default continues , "
[Provided that in case of contravention of the proviso to clause (a) of ,sub- section (1), every such officer, and every promoter of the company who is guilty of the contravention shall be punishable with fine which may extend to fifty thousand rupees .
(5) Nothing in this section shall apply to the issue and allotment by a company of shares which under the provisions of its article, were forfeited for non payment of calls.
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Section 150 - Register of Member
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Every company which issues shares, shall enter the particulars of the person in the Register of the Member, maintained for the purpose.
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The text of section has been outlined below:
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1) Every company shall keep in one or more books a register of its members, and enter therein the following particulars :-
(a) the name and address, and the occupation, if any, of each member;
(b) in the case of a company having a share capital, the shares held by each member, distinguishing each share by its number except where such shares are held with a depository,and the amount paid or agreed to be considered as paid on those shares;
(c) the date at which each person was entered in the register as a member; and
(d) the date at which any person ceased to be a member ;
Provided that where the company has converted any of its shares into stock and given notice of the conversion to the Registrar, the register shall show the amount of stock held by each of the members concerned instead of the shares so converted which were previously held by him.
(2) If default is made in complying with sub-section (1), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues.
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Section 113
- Limitation of time for issue of certificates
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Every Company allotting any shares, is required to issue share certificates within 3 months of the allotment to the shareholder.
Provides where shares are allotted in electronic form, than there is no need of issuing the share certificates
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The text of section has been outlined below:
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1) [Every company, unless prohibited by any provision of law or of any order of any court, tribunal or other authority, shall, within three months after the allotment of any of its shares, debentures or debenture stock, and within two months after the application 68 for the registration of the transfer of any such shares, debentures or debenture stock, deliver, in accordance with the procedure laid down in section 53, the certificates of all shares, debentures and certificates of debenture stocks allotted or transferred : Provided that the Company Law Board may, on an application being made to it in this behalf by the company, extend any of the periods within which the certificates of all debentures and debenture stocks allotted or transferred shall be delivered under this sub-section, to a further period not exceeding nine months, if it is satisfied that it is not possible for the company to deliver such certificates within the said periods.] The expression "transfer", for the purposes of this sub-section, means a transfer duly stamped and otherwise valid, and does not include any transfer which the company is for any reason entitled to refuse to register and does not register.
(2) If default is made in complying with sub-section (1). the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees for every day during which the default continues.
(3) If any company on which a notice has been served requiring it to make good any default in complying with the provisions of sub-section (1), fails to make good the default within ten days after the service of the notice, the Company Law Board may, on the application of the person entitled to have the certificates or the debentures delivered to him, make an order directing the company and any officer of the company to make good the default within such time as may be specified in the order; and any such order may provide that all costs of and incidental to the application shall be borne by the company or by any officer of the company responsible for the default.
[(4) Notwithstanding anything contained in sub-section (1), where the securities are dealt with in a depository. the company shall intimate the details of allotment of securities to depository immediately on allotment of such securities.
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Section 198 & 309
- Remuneration to Directors
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Section 198 & 309 deals with the remuneration to be given to any Director, by the Company. Section 198 provides that the total remuneration payable to any Director shall not exceed 11% of the profits calculated in the manner prescribed under the Companies Act while Section 309 provides the specific limits and manner in which remuneration shall be paid to executive and non executive director.
A question arises whether ESOP granted to any Director shall be treated as remuneration or not? As per our view, since there are benefits, which arises on exercising of ESOP by any Director, therefore the same shall be treated as part of his remuneration. Moreover the fact, that the tax law also treats ESOP as perquisites and tax it in hands of the recipient as part of his salary, also supports our view.
Therefore while granting ESOP, the said aspect relating to limits of remuneration prescribed under the Companies Act should also be evaluated.
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The text of section has been outlined below:
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198 Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits.
(1) The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company, to its directors and its manager in respect of any financial year shall not exceed eleven per cent of the net profits of that company for that financial year computed in the manner laid down in sections 349 and 350 except that the remuneration of the directors shall not be deducted from the gross profits:
(2) The percentage aforesaid shall be exclusive of any fees payable to directors under sub-section (2) of section 309.
(3) Within the limits of the maximum remuneration specified in sub-section (1), a company may pay a monthly remuneration to its manager whole-time director in accordance with the provisions of section 309 or to its manager In accordance with the provisions of section 387.
(4) Notwithstanding anything contained in sub-sections (1) to (3), but subject to the provisions of section 269, read with Schedule XIII, if, in any financial year, a company has no profits or its profits are inadequate, the company shall hot pay to its directors, including any managing or whole time director or manager, by way of remuneration any sum exclusive of any fees payable to directors under sub-section (2) of section 309,except with the previous approval of the Central Government.
Explanation: For the purposes of this section and sections 309, 310, 311, 381 and 387, "remuneration" shall include,-
(a) any expenditure incurred by the company in providing any rent. accommodation, or any other benefit or amenity in respect of accommodation free of charge, to any of the persons specified in sub-sec (1);
(b) any expenditure incurred by the company in providing any other benefit or amenity free of charge or at a concessional rate to any the persons aforesaid;
(c) any expenditure incurred by the company in respect of any obligation , or service, which, but for such expenditure by the company, would have been incurred by any of the persons aforesaid; and
(d) any expenditure incurred by the company to effect any insurance the life of, or to provide any pension, annuity or gratuity for, any of persons aforesaid or his spouse or child.]
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309 Remuneration of directors.
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Every Company allotting any shares, is required to issue share certificates within 3 months of the allotment to the shareholder.
Provides where shares are allotted in electronic form, than there is no need of issuing the share certificates
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The text of section has been outlined below:
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1) The remuneration payable to the directors of a company, including any managing or whole-time director, shall be determined, in accordance with and subject to the provisions of section 198 and this section, either by the articles of the company, or by a resolution or, if the articles so required, by a special resolution, passed by the company in general meeting and remuneration payable to any such director determined as aforesaid shall be inclusive of the remuneration payable to such director for services rendered by him in any other capacity:
Provided that any remuneration for services rendered by any such director in any other capacity shall not be so included if
(a) the services rendered are of a professional nature, and
(b) in the opinion of the Central Government, the director possesses the requisite qualifications for the practice of the profession
(2) A director may receive remuneration by way of a fee of Board, or a committee thereof, attended by him :
Provided that where immediately before the commencement (Amendment) Act, 1960, fees for meetings of the Board and any committee thereof, attended by a director are paid on a monthly basis, such fees may continue to be paid on that basis for a period of two years after such commencement or for the remainder of the term of office of such director but no longer.
(3) A director who is either in the whole-time employment of the company or a managing director may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the by one way and partly by the other:
Provided that except with the approval of the Central Government such remuneration shall not exceed five per cent of the net profits for one such director, and if there is more than one such director, ten per cent for all of the together.
(4) A director who is neither in the whole-time employment a managing director may be paid remuneration-
either
(a) by way of a monthly, quarterly or annual payment with the approval of the Central Government;
( b) by way of commission if the company by special resolution authorises such payment:
Provided that the remuneration paid to such director, or where there is more than one such director, to all of them together, shall not exceed-
(i) one per cent of the net profits of the company, if the company has a managing or whole-time director or a manager ;
(ii) three per cent of the net profits of the company, in any other case :
Provided further that the company in general meeting may, with the approval of the Central Government, authorise the payment of such remuneration at a rate exceeding one per cent or, as the case may be, three per cent of its net profits.
(5) The net profits referred to in sub-sections (3) and (4) shall be computed in the manner referred to in section 198, sub-section (1).
(5A) If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without the prior sanction of the Central Government, where it is required, he shall refund such sums to the company and until such sum is refunded, hold it in trust for the company.
(5B) The company shall not waive the recovery of any sum refundable to it under sub-section (5A) unless permitted by the Central Government.
(6) No director of a company who is in receipt of any commission from the company and who is either in the whole-time employment of the company or a managing director shall be entitled to receive any commission or other remuneration from any subsidiary of such company.
(7) The special resolution referred to in sub-section (4) shall not remain in force for a period of more than five years; but may be renewed, from time to time, by special resolution for further periods of not more than five years at a time :
Provided that no renewal shall be effected earlier than one year from the date on which it is to come into force.
(8) The provisions of this section shall come into force immediately on the commencement of this Act or, where such commencement does not coincide with the end of a financial year of the company, with effect from the expiry of the financial year immediately succeeding such commencement.
(9) The provisions of this section shall not apply to a private company unless it is a subsidiary of a public company.
the Company Law Board may, on the application of the person entitled to have the certificates or the debentures delivered to him, make an order directing the company and any officer of the company to make good the default within such time as may be specified in the order; and any such order may provide that all costs of and incidental to the application shall be borne by the company or by any officer of the company responsible for the default.
[(4) Notwithstanding anything contained in sub-section (1), where the securities are dealt with in a depository. the company shall intimate the details of allotment of securities to depository immediately on allotment of such securities.
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Section 113
- Limitation of time for issue of certificates
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Company shall within thhree months after the
allotment of any of its shares and within two months after the application for the registration of the transfer of
shares shall deliver Share Certificate in accordance with the procedure laid down in the section 53 of of the Companies Act 1957. |
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The text of section has been outlined below:
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1) [Every company, unless prohibited by any provision of law or of any order of any court, tribunal or other authority, shall, within three months after the allotment of any of its shares, debentures or debenture stock, and within two months after the application 68 for the registration of the transfer of any such shares, debentures or debenture stock, deliver, in accordance with the procedure laid down in section 53, the certificates of all shares, debentures and certificates of debenture stocks allotted or transferred : Provided that the Company Law Board may, on an application being made to it in this behalf by the company, extend any of the periods within which the certificates of all debentures and debenture stocks allotted or transferred shall be delivered under this sub-section, to a further period not exceeding nine months, if it is satisfied that it is not possible for the company to deliver such certificates within the said periods.] The expression 'transfer", for the purposes of this sub-section, means a transfer duly stamped and otherwise valid, and does not include any transfer which the company is for any reason entitled to refuse to register and does not register.
(2) If default is made in complying with sub-section (1). the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees for every day during which the default continues.
(3) If any company on which a notice has been served requiring it to make good any default in complying with the provisions of sub-section (1), fails to make good the default within ten days after the service of the notice, the Company Law Board may, on the application of the person entitled to have the certificates or the debentures delivered to him, make an order directing the company and any officer of the company to make good the default within such time as may be specified in the order; and any such order may provide that all costs of and incidental to the application shall be borne by the company or by any officer of the company responsible for the default.
[(4) Notwithstanding anything contained in sub-section (1), where the securities are dealt with in a depository. the company shall intimate the details of allotment of securities to depository immediately on allotment of such securities.
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SEBI (ESOP & ESPS) Guidelines 1999 |
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SEBI (Employees Stock Option Scheme and Employees Stock Purchase Scheme) Guidelines, 1999
In case of listed companies, issue of ESOP Scheme is governed by the Securities and Exchange Board of India. For the said purpose, SEBI has issued the necessary guidelines in form of SEBI (Employees Stock Option Scheme and Employees Stock Purchase Scheme) Guidelines, 1999.
Silent features of the guidelines are outlined below:
Eligible persons under the guidelines are:
a) Permanent employee of the company working in India or outside India;
b) Directors of the company whether whole time or not;
Persons covered under a) or b) of a subsidiary company in India or abroad or of the holding company of the company.
Persons not eligible under the guidelines are:
a) An employee who is a promoter or belong to the promoter group;
b) A director who is either himself or through his relative or body corporate holds more than 10% of the outstanding equity shares of the company.
- Company to issue detailed offer document to the eligible employees at the time of Grant of option.
- Scheme should be approved by special resolution by the shareholders in the general meeting of the company.
- In case company opts for ESOS, Company to constitute a compensation committee which shall consists of majority of the independent directors.
- Company to appoint a registered merchant banker for implementing the scheme in the proper manner.
- Shares issued under the scheme shall include ADR/GDR, other depository receipts or securities convertible into equity shares.
- In case of ESOS, there should be minimum vesting period of one year for the grant of options; however there is no requirement of the same in case of ESPS.
- In case of ESPS there shall be minimum 1 year lock in period from the date of allotment; however in case of ESOS, there is no legal requirement of any lock-in period after the date of allotment.
- In case the option is granted to the nominee director under any ESOP scheme, then such option cannot be renounce in favor of the financial institution who has nominated such director.
- Option so granted cannot be transferred, pledged, hypothecated, mortgaged or otherwise alienated in any manner.
- Company should take in principle approval from the stock exchange where the company is already listed.
- Shares issued under the ESOS scheme shall be listed immediately upon the allotment, in any recognized stock exchange where the company is already listed.
- The terms of the ESOS can be amended with Shareholders approval, to the extent which will not be detrimental to the interests of the employees of the company.
- The company has freedom to decide the exercise price of the shares arising out of options granted to the employees under ESOS and shares offered under ESPS..
- The employees who accepts the grant of the options by the company, will receive all the benefits provided to the shareholders during the Vesting Period of the options at the time of allotment of shares.
- There is no Voting Rights on the options granted.
- In case of Death of the employee while in employment, all options vesting on the date of death of the employee will be transferred to the legal heirs or nominees of the deceased employee.
- A regular disclosure in the Directors report be given to the shareholders with regard to ESOS during the life time of ESOS.
- The number of options / shares to be offered under ESOS, may be different for different categories of employees.
- The options granted to the employees shall be treated as compensation in the hands of the employee.
- The company has an option either to allot the shares to individual employees directly or one time allotment to Employees Trust which will transfer the shares to the employees as when they become eligible.
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