SECURITIES AND EXCHANGE BOARD OF INDIA

SECURITIES AND EXCHANGE BOARD OF INDIA

(EMPLOYEE STOCK OPTION SCHEME AND
EMPLOYEE STOCK PURCHASE SCHEME) GUIDELINES, 1999

1. Short title and commencement:

1.1 These Guidelines have been issued by Securities and Exchange Board of India under Section 11 of the Securities and Exchange Board of India Act, 1992.

1.2 These Guidelines may be called the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme), Guidelines, 1999.

2. Definitions:

2.1 In these Guidelines, unless otherwise defined;-

(1)"employee" means

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 sub-clauses (a) or (b) of a subsidiary, in India or out of India, or of a holding company of the company.

(2)" employee compensation" means 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 :

(a) the fair value of the option granted under an Employee Stock Option Scheme; and
(b) the discount at which shares are issued under an Employee Stock Purchase Scheme.

(3) "employee stock option scheme (ESOS)" means a scheme under which a company grants option to employees.

(4) "employee stock purchase scheme (ESPS)" means a scheme under which the company offers shares to employees as part of a public issue or otherwise.

(5)"exercise" means making of an application by the employee to the company for issue of shares against option vested in him in pursuance of the ESOS.

(6) "exercise period" means the time period after vesting within which the employee should exercise his right to apply for shares against the option vested in him in pursuance of the ESOS.

(7) "exercise price" means the price payable by the employee for exercising the option granted to him in pursuance of ESOS.

(8) " grant" means issue of option to employees under ESOS.

(9)"independent director" means a director of the company, not being a whole time director and who is neither a promoter nor belongs to the promoter group.

(10)"market price" of a share on a given date means the closing price of the shares on that date on the stock exchange on which the shares of the company are listed.

[ Explanation: If the shares are listed on more than one stock exchange, but quoted only on one stock exchange on the given date, then the price on that stock exchange should be considered. If the share price is quoted on more than one stock exchange, then the stock exchange where there is highest trading volume on that date should be considered. If share price is not quoted on the given date, then the share price on the next trading day should be considered.]

(11)"option" means a right but not an obligation granted to an employee in pursuance of ESOS to apply for shares of the company at a pre- determined price.

(12)"promoter" means;

(a) the person or persons who are in over-all control of the company;

(b) the person or persons who are instrumental in the formation of the company or programme pursuant to which the shares were offered to the public;

(c) the persons or persons named in the offer document as promoter(s).
Provided that a director or officer of the company, if they are acting as such only in their professional capacity will not be deemed to be a promoter.

[Explanation: Where a promoter of a company is a body corporate, the promoters of that body corporate shall also be deemed to be promoters of the company.]

(13) "promoter group" means

(a) an immediate relative of the promoter (i.e. spouse of that person, or any parent, brother, sister or child of the person or of the spouse);

(b)persons whose shareholding is aggregated for the purpose of disclosing in the offer document "shareholding of the promoter group".

(14)"share" means equity shares and securities convertible into equity shares and shall include American Depository Receipts (ADRs), Global Depository Receipts (GDRs) or other depository receipts representing underlying equity shares or securities convertible into equity shares.

(15)"vesting" means the process by which the employee is given the right to apply for shares of the company against the option granted to him in pursuance of ESOS.

(16) "vesting period" means the period during which the vesting of the option granted to the employee in pursuance of ESOS takes place.

2.2 All other expressions unless defined herein shall have the same meaning as have been assigned to them under the Securities and Exchange Board of India Act, 1992 or the Securities Contracts (Regulation) Act, 1956 or the Companies Act, 1956, SEBI ( Disclosure and Investor Protection ) Guidelines, or any statutory modification or re-enactment thereof, as the case may be.

3. Applicability

3.1 These Guidelines shall apply to any company whose shares are listed on any recognised stock exchange in India.

PART - A - ESOS

4. Eligibility to participate in ESOS

4.1 An employee shall be eligible to participate in ESOS of the company.

4.2 An employee who is a promoter or belongs to the promoter group shall not be eligible to participate in the ESOS.

4.3 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.

5. Compensation Committee

5.1 No ESOS shall be offered unless the company constitutes a Compensation Committee for administration and superintendence of the ESOS.

5.2 The Compensation Committee shall be a Committee of the Board of Directors consisting of a majority of independent directors.

5.3 The Compensation Committee shall, inter alia, formulate the detailed terms and conditions of the ESOS including;-

(a) the quantum of option to be granted under an ESOS per employee and in aggregate.

(b)the conditions under which option vested in employees may lapse in case of termination of employment for misconduct;

(c) the exercise period within which the employee should exercise the option and that option would lapse on failure to exercise the option within the exercise period;

(d) the specified time period within which the employee shall exercise the vested options in the event of termination or resignation of an employee.

(e) the right of an employee to exercise all the options vested in him at one time or at various points of time within the exercise period;

(f) the procedure for making a fair and reasonable adjustment to the number of options and to the exercise price in case of rights issues, bonus issues and other corporate actions;

(g) the grant, vest and exercise of option in case of employees who are on long leave; and

(h)the procedure for cashless exercise of options.

5.4 The Compensation Committee shall frame suitable policies and systems to ensure that there is no violation of ;-

a) Securities and Exchange Board of India ( Insider Trading ) Regulations,1992; and

b) Securities and Exchange Board of India ( Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market ) Regulations,1995,

by any employee.

6. Shareholder approval

6.1 No ESOS can be offered to employees of a company unless the shareholders of the company approve ESOS by passing a special resolution in the general meeting.

6.2 The explanatory statement to the notice and the resolution proposed to be passed in general meeting for ESOS shall, inter alia, contain the following information :

(a) the total number of options to be granted;

(b) identification of classes of employees entitled to participate in the ESOS;

(d) maximum period (subject to clause 9.1) within which the options shall be vested;

(e) exercise price or pricing formula;

(f) exercise period and process of exercise;

(g) the appraisal process for determining the eligibility of employees to the ESOS;

(h) maximum number of options to be issued per employee and in aggregate;

(i) a statement to the effect that the company shall conform to the accounting policies specified in clause 13.1.

6.3Approval of shareholders by way of separate resolution in the general meeting shall be obtained by the company in case of ;

(a) grant of option to employees of subsidiary or holding company and,

(b) grant of option to identified employees, during any one year, equal to or exceeding 1% of the issued capital
(excluding outstanding warrants and conversions) of the company at the time of grant of option.

7. Variation of terms of ESOS

7.1 The company shall not vary the terms of the ESOS in any manner which may be detrimental to the interests of the employees.

7.2 The company may by special resolution in a general meeting vary the terms of ESOS offered pursuant to an earlier resolution of a general body but not yet exercised by the employee provided such variation is not prejudicial to the interests of the option holders.

7.3 The provisions of clause 6.3 shall apply to such variation of terms as they do to the original grant of option.

7.4 The notice for passing special resolution for variation of terms of ESOS shall disclose full details of the variation, the rationale therefor, and the details of the employees who are beneficiary of such variation.

8. Pricing

8.1 The companies granting option to its employees pursuant to ESOS will have the freedom to determine the exercise price subject to conforming to the accounting policies specified in clause 13.1.

9. Lock-in period and rights of the option-holder

9.1 There shall be a minimum period of one year between the grant of options and vesting of option.

9.2 The company shall have the freedom to specify the lock-in period for the shares issued pursuant to exercise of option.

9.3 The employee shall not have right to receive any dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to him, till shares are issued on exercise of option.

10. Consequence of failure to exercise option

10.1. The amount payable by the employee, if any, at the time of grant of option;-

(a) may be forfeited by the company if the option is not exercised by the employee within the exercise period; or

(b) the amount may be refunded to the employee if the option are not vested due to non-fulfillment of condition relating to vesting of option as per the ESOS.

11. Non transferability of option

11.1 Option granted to an employee shall not be transferable to any person.

11.2

(a) No person other than the employee to whom the option is granted shall be entitled to exercise the option.

(b) Under the cashless system of exercise, the company may itself fund or permit the empanelled stock brokers to fund the payment of exercise price which shall be adjusted against the sale proceeds of some or all the shares, subject to the provision of the Companies Act.

11.3 The option granted to the employee shall not be pledged, hypothecated, mortgaged or otherwise alienated in any other manner
.

11.4 In the event of the death of employee while in employment, all the option granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.

11.5 In case the employee suffers a permanent incapacity while in employment, all the option granted to him as on the date of permanent incapacitation, shall vest in him on that day.

11.6 In the event of resignation or termination of the employee, all options not vested as on that day shall expire. However, the employee shall, subject to the provision of clause 5.3 (b) shall be entitled to retain all the vested options.

12. Disclosure in the Directors' Report

12.1 The Board of Directors, shall, inter alia, disclose either in the Directors Report or in the annexure to the Director's Report, the following details of the ESOS:

(a)options granted;

(b)the pricing formula;

(c)options vested;

(d)options exercised;

(e)the total number of shares arising as a result of exercise of option;

(f)options lapsed;

(g)variation of terms of options;

(h)money realised by exercise of options;

(i)total number of options in force;

(j)employee wise details of options granted to;-

(i)senior managerial personnel;

(ii)any other employee who receives a grant in any one year of option amounting to 5% or more of option granted during that year.

(iii)identified employees who were granted option, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant;

(k)diluted Earnings Per Share (EPS) pursuant to issue of shares on exercise of option calculated in accordance with International Accounting Standard (IAS) 33.

13. Accounting Policies

13.1 Every company that has passed a resolution for an ESOS under clause 6.1 of these guidelines shall comply with the accounting policies specified in Schedule I.

14. Certificate from Auditors

14.1 In the case of every company that has passed a resolution for an ESOS under clause 6.1 of these guidelines, the Board of Directors shall at each annual general meeting place before the shareholders a certificate from the auditors of the company that the scheme has been implemented in accordance with these guidelines and in accordance with the resolution of the company in the general meeting.

15. Options outstanding at Public Issue

15.1 The provisions of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines prohibiting initial public offering by companies having outstanding warrants and financial instruments shall not be applicable in case of outstanding option granted to employees in pursuance of ESOS.

15.2 If any option is outstanding at the time of an initial public offering by a company, the promoters' contribution shall be calculated with reference to the enlarged capital which would arise on exercise of all vested options.

15.3 If any options granted to employees in pursuance of ESOS are outstanding at the time of initial public offering, the offer document of the company shall disclose all the information specified in clause 12.1.

PART-B- ESPS

16. Eligibility to participate in ESPS.

16.1 An employee shall be eligible to participate in the ESPS.

16.2 An employee who is a promoter or belongs to the promoter group shall not be eligible to participate in the ESPS.

16.3 A director who either by himself or through his relatives 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 ESPS.

17. Shareholder Approval

17.1 No ESPS shall be offered to employees of the company unless the shareholders of the company approve ESPS by passing special resolution in the meeting of the general body of the shareholders.

17.2 The explanatory statement to the notice shall specify :

(a) the price of the shares and also the number of shares to be offered to each employee.

(b) the appraisal process for determining the eligibility of employee for ESPS.

17.3 The number of shares offered may be different for different categories of employees.

17.4 The special resolution shall state that the company shall conform to the accounting policies specified in clause 19.2.

18. Pricing and Lock-in

18.1 The company shall have the freedom to determine price of shares to be issued under an ESPS, provided they conform to the provisions of clause 19.2.

18.2 Shares issued under an ESPS shall be locked in for a minimum period of one year from the date of allotment.

18.3 If the ESPS is part of a public issue and the shares are issued to employees at the same price as in the public issue, the shares issued to employee pursuant to ESPS shall not be subject to any lock-in.

19. Disclosure and Accounting Policies

19.1 The Directors’ Report or Annexure thereto shall contain, inter alia, the following disclosures :-

(a) the details of the number of shares issued in ESPS;

(b) the price at which such shares are issued;

(i) senior managerial personnel;

(ii) any other employee who is issued shares in any one year amounting to 5% or more shares issued during that year;

(iii) identified employees who were issued shares during any one year equal to or exceeding 1% of the issued capital of the company at the time of issuance;

(d) diluted Earning Per Share (EPS) pursuant to issuance of shares under ESPS; and

(e) consideration received against the issuance of shares.

19.2 Every company that has passed a resolution for an ESPS under clause 17.1 of these guidelines shall comply with the accounting policies specified in Schedule II.

20. Preferential Allotment

20.1 Nothing in these guidelines shall apply to shares issued to employees in compliance with the Securities and Exchange Board of India Guidelines on Preferential Allotment.

21. Part D of Clarification XIV of DIP Guidelines

21.1 Part D of the Clarification XIV dated March 1, 1996, of the SEBI ( Disclosure and Investor Protection ) Guidelines shall not be applicable in case of ESOS and ESPS.

22. Listing

22.1 In case of listed companies, the shares arising pursuant to an ESOS and shares issued under an ESPS, shall be eligible for listing in any recognised stock exchange only if such schemes ( i.e. ESOS or ESPS ) are in accordance with these Guidelines.

23. Commencement of the Guidelines

23.1 These guidelines shall come into force w.e.f. 19^th June,1999.

SCHEDULE I
( Clause 13.1 )

Accounting Policies for ESOS

(a) In respect of options granted during any accounting period, the accounting value of the options shall be treated as another form of employee compensation in the financial statements of the company.

(b) The accounting value of options shall be equal to the aggregate, over all employee stock options granted during the accounting period, of the fair value of the option.

For this purpose :

1. Fair value means the option discount, or, if the company so chooses, the value of the option using the Black Scholes formula or other similar valuation method.

2. Option discount means the excess of the market price of the share at the date of grant of the option under ESOS over the exercise price of the option (including up-front payment, if any)

(c) Where the accounting value is accounted for as employee compensation in accordance with ‘b’, the amount shall be amortised on a straight-line basis over the vesting period.

(d) When an unvested option lapses by virtue of the employee not conforming to the vesting conditions after the accounting value of the option has already been accounted for as employee compensation, this accounting treatment shall be reversed by a credit to employee compensation expense equal to the amortized portion of the accounting value of the lapsed options and a credit to deferred employee compensation expense equal to the unamortized portion.

(e) When a vested option lapses on expiry of the exercise period, after the fair value of the option has already been accounted for as employee compensation, this accounting treatment shall be reversed by a credit to employee compensation expense.

(f) The accounting treatment specified above can be illustrated by the following numerical example :-

Suppose a company grants 500 options on 1/4/1999 at Rs 40 when the market price is Rs 160, the vesting period is two and a half years, the maximum exercise period is one year. Also suppose that 150 unvested options lapse on 1/5/2001, 300 options are exercised on 30/6/2002 and 50 vested options lapse at the end of the exercise period. The accounting value of the option being :

500 x (160-40) = 500 x 120 = 60,000

The accounting entries would be as follows:

1/4/1999	Deferred Employee Compensation Expense Employee Stock Options Outstanding (Grant of 500 options at a discount of Rs 120 each)	60,000	60,000
31/3/2000	Employee Compensation Expense Deferred Employee Compensation Expense (Amortisation of the deferred compensation over two and a half years on straight-line basis)	24,000	24,000
31/3/2001	Employee Compensation Expense Deferred Employee Compensation Expense (Amortisation of the deferred compensation over two and a half years on straight-line basis)	24,000	24,000
1/5/2001	Employee Stock Options Outstanding Employee Compensation Expense Deferred Employee Compensation Expense (Reversal of compensation accounting on lapse of 150 unvested options)	18,000	14,400 3,600
31/3/2002	Employee Compensation Expense Deferred Employee Compensation Expense (Amortisation of the deferred compensation over two and a half years on straight-line basis)	8,400	8,400
30/6/2002	Cash Employee Stock Options Outstanding Paid Up Equity Capital Share Premium Account (Exercise of 300 options at an exercise price of Rs 40 each and an accounting value of Rs 120 each)	12,000 36,000	3,000 45,000
1/10/2002	Employee Stock Options Outstanding Employee Compensation Expense (Reversal of compensation accounting on lapse of 50 vested options at the end of exercise period)	6,000	6,000

The T-Accounts for Employee Stock Options Outstanding and Deferred Employee Compensation Expense would be as follows:

Employee Stock Options Outstanding Account

1/5/2001	Employee Compensation/ Deferred Compensation	18,000	1/4/1999	Deferred Compensation	60,000
30/6/2002	Paid Up Capital/ Share Premium	36,000
1/10/2002	Employee Compensation	6,000
		60,000			60,000

Deferred Employee Compensation Expense Account

1/4/1999	ESOS Outstanding	60,000	31/3/2000	Employee Compensation	24,000
			31/3/2001	Employee Compensation	24,000
			1/5/2001	ESOS Outstanding	3,600
			31/3/2002	Employee Compensation	8,400
		60,000			60,000

Employee Stock Options Outstanding will appear in the Balance Sheet as part of Net Worth or Shareholders' Equity. Deferred Employee Compensation will appear in the Balance Sheet as a negative item as part of Net Worth or Shareholders' Equity.

SCHEDULE II
( Clause 19.2 )

Accounting Policies for ESPS

(a) In respect of shares issued under an ESPS during any accounting period, the accounting value of the shares so issued shall be treated as another form of employee compensation in the financial statements of the company.

(b) The accounting value of shares issued under ESPS shall be equal to the aggregate of price discount over all shares issued under ESPS during any accounting period ;

For this purpose :

Price discount means the excess of the market price of the shares at the date of issue over the price at which they are issued under the ESPS.

Suppose a company issues 500 shares on 1/4/1999 under an ESPS at Rs 40 when the market price is Rs 160. The accounting value of the shares being :

500 x (160-40) = 500 x 120 = 60,000

The accounting entry would be as follows :

1/4/1999

Cash

Employee Compensation Expense

Paid Up Equity Capital

Share Premium Account

(Issue of 500 shares under ESPS at a price of Rs 40 each when market price is Rs 160)

20,000

60,000

5,000

75,000

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