What is an ESOP Policy?
An ESOP policy is a policy formulated by a company at any stage while issuing ESOPs to its employees. The company can formally grant ESOPs in the form of grant letters, and every company has the 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.
What are the Important Clauses to be Included?
While drafting an ESOP policy, certain clauses are mandatory, and will affect the framework of the policy. It must be drafted looking into the terms and conditions of the Act and Rules, along with keeping in mind the rights and liabilities of employers and employees. The following clauses are to be included:
- Regulatory guidelines governing the issue of ESOPs, i.e. the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;
- The class of employees eligible for receiving ESOPs, and the eligibility criteria that determine who is allotted ESOPs;
- Constitution of a Compensation Committee for the administration and superintendence of the ESOPs, as required under the abovementioned Rules;
- Requirements of the vesting period, lock-in period, and exercise price of ESOPs;
- The methods used by the company to value its options, conditions of lapsing, and consequences of failure to exercise the option.
Disclosures to be Made While Issuing an ESOP Policy
As per the Companies Act, 2013, issuing ESOPs requires passing of a special resolution. A notice of special resolution requires disclosures in explanatory statements, which are attached to the notice. Hence, all such disclosures are to be made while sending notices for the issue of ESOPs.
Conclusion
ESOPs are a good way to encourage employees and motivate them to work hard towards the company's goals. Companies have the freedom to draft their own policy, which helps them issue ESOPs as per their convenience and for the betterment of the company. Hence, the basic clauses discussed above are to be looked into before drafting the policy.
Disclaimer: The content of this article is intended to provide general guidance on the subject matter. Specialist advice should be sought about your specific circumstances.