ESOP Scheme under the Companies Act, 2013 for Private companies

The provisions relating to issue of ESOPs applicable for all unlisted Companies are:
i.

Employee under an ESOP Scheme - Rule 12(1) read with Section 2(37), 197(7) of
the Act defines the term to mean any permanent employee or Director whether a
whole-time or not and whether working in India or not. The employees and Directors
of the Holding, Subsidiary and Associate Company are also covered. The specific
exclusions are: a) An Independent Director; b) An employee who is a Promoter or
belongs to the Promoter Group; and c) A Director who directly or indirectly holds
more than 10% of outstanding equity shares of the Company.

ii.

Procedural requirements - Rules 12(1), 12(2) and 12(4) read with section 62(1)(b)
of the Act require:
a) Approval of the ESOP Scheme by the members of the Company by way of a
special resolution;
b) There shall be separate resolutions in case of grant of ESOPs to employees of the
Subsidiary or Holding Company or in case of grant of ESOPs to identified employees
equal to or exceeding 1% of the issued capital; and
c) The explanatory statement shall disclose prescribed details namely total number of
ESOPs to be granted, appraisal process, requirements of vesting, exercise price or
pricing formula, exercise period, lock-in period, method of accounting, etc.

iii.

Other requirements - Rest of the Sub-rules of Rule 12 besides giving the flexibility
to the Company to determine the exercise price and lock-in of shares, require:
a) Variation of terms of the ESOPs to be carried out by way of members approval by
way of a special resolution provided it is not prejudicial to the interests of the
employees;
b) Minimum vesting period of 1 year;
c) Non-transferability of the ESOPs;
d) Unvested ESOPs to vest in case of death or permanent incapacity of an employee;
e) Disclosure of prescribed details in the Directors Report; and
f) Maintenance of an ESOP Register.