Model Employee Stock Option

Scheme
[insert name of the company]

The Employee Stock Option (ESOP) Scheme, 2013

Notes:

1) A company may commence with different ESOP schemes for different

categories of employees. Further, the board of directors may consider
framing different schemes depending on the growth phase and situation of
the company.

2) Check the articles of association of the company to verify that the board has
the power to issue shares to potential employees under an ESOP scheme
without taking approval of the existing shareholders. If the board does not
have this power, the ESOP scheme framed by the board will require
shareholder approval in a general meeting as well.

1. Introduction

This document sets out the terms and conditions of an ESOP, the duties
and responsibilities of the recipient and also, the benefits and the
procedures to be followed.

2. Objective of an ESOP

The purpose of ESOP is to provide an ongoing mechanism for rewarding

executives of [Insert name of the company] (hereinafter referred to as “the
Company”) for their continued and valuable services. The ESOP is merit for a
selected category of employees of the company as decided from time to time by
the management of the company. The ESOP has been so designed to reward
the continued association of an individual with the company for the given future
period. The ESOP will be implemented on a yearly basis.

3. Administration of the ESOP

[Comment: Companies may either implement ESOP schemes directly or create a trust.

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 Creation of a trust has certain strategic advantages for both the employees and the
company. This ESOP scheme envisages the use of a ‘trust’ which holds all the shares of
the company under the ESOP scheme. For creation of the trust, a basic trust deed will
also have to be executed and registered under the Indian Registration Act, 1908. Next,
shares under the ESOP scheme will have to be issued to the trust.]

The company would create an employee’s welfare trust for implementing the ESOP
and allot to the trust [●] [insert no. of equity shares in words and figures] equity
shares so as to constitute [●] % of the post issue paid up equity share capital. The
trust in turn has a right to issue a warrant to the employees of the company. Each
warrant carries with it the right to apply for and be allotted one equity share of
the company at the exercise price. The trust is to hold the warrants for and on
behalf of the employees and transfer the same to them as and when advised.
The company has constituted a Compensation Committee to choose eligible
employees for grant of warrants. The trust would issue warrants to the
employees on the basis of the advice of the Compensation Committee.

4. Employees

Only bona fide full-time employees of the company in confirmed service are
eligible under this ESOP. The selection shall be based on various factors - the
performance appraisal, minimum period of services rendered by the employee,
the status of the employees in the company and the present and potential
contribution of the employees to the success of the company and any other
factor deemed relevant by the Compensation Committee. The promoter,
directors are not eligible to participate in this ESOP.

[Comment: The board may constitute a Compensation Committee comprising a

selected group of directors. The Compensation Committee determines the principles
for grant of ESOP and to select employees who may be granted options from time to
time. It has significant freedom to select which employees should be considered for
grant of options. Nevertheless, identifying key principles under the compensation
policy which is published and known to the employees can encourage fairness and
transparency.]

5. Government regulations

This ESOP shall be subject to all applicable laws, rules, regulations and to such
approvals by any governmental agencies as may be required. The grant of
warrants/shares under this ESOP shall entitle the company to require the
employee to comply with such requirements of law or, may be necessary in the
opinion of the company.

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 6. General risks

Participation in this ESOP shall not be construed as any guarantee of return on

the equity investment. Any loss due to this investment and the risks associated
with the investment are that of the employee alone.

7. Warrants
[Comment: The employee does not immediately get shares but gets options in the
form of ‘warrants’ to purchase shares at a future date. The warrants are nominally
priced, e.g. INR 1 in this case. Each warrant will allow the employee to purchase a
certain number of shares at a future date, once the option pursuant to the warrant
‘vests’. Only a fraction of the warrants vest at a time, as Clause 7.4(a) will indicate.]

7.1. Issue of warrants:

(a) The warrants shall be issued to the employees in lots of 100, against
consideration of payment to the trust of a sum of Re. 1/- per warrant
or such other sum as the trust may decide from time to time. Such
transfer shall be made upon the specific recommendation of the
Compensation Committee.

(b) The warrant shall not be transferable by the employee except back to
the trust on the happening of certain events as mentioned in the
following clauses 7.1 (c) and 7.1 (d).

(c) In the event, an employee ceases to be an employee of the company

by reason of resignation, dismissal or severance of employment due
to reason of non-performance or otherwise, the warrants held by the
employee shall forthwith be caused to be transferred to the trust at
the same consideration as mentioned in clause 7.1(a).

(d) In the event of the employee’s death or attaining the age of

superannuation while in service, the rights and obligations under the
warrants shall accrue to his legal heirs or representatives.

7.2 Exercise of warrants:

Each warrant entitles the holder thereof to apply for and be allotted one
equity share of the nominal value on the payment of the exercise price at
any time during the exercise period.

7.3 Exercise price:

The exercise price of the warrant shall be declared at the time of issue of
the warrant.

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 7.4 Exercise Period:

(a) The option to apply for conversion of the warrant shall be exercisable
as per a vesting schedule as follows:

● On completion of [●] months from the date of issue of the warrant:

one- third;

● On completion of [●] months from the date of issue the warrant: one-
third;

● On completion of [●] months from the date of issue the warrant: last
one- third.

On vesting, the option will have to be exercised within one month

of vesting.

[Comment: This clause prescribes the vesting schedule for ESOPs. A

company can adopt a different vesting schedule under the ESOP plan.]

(b) In case the warrants are not exercised by the employee in the exercise
period, they will lapse & no rights will accrue after that date. The
amount paid on the warrant of Re 1/- shall in the event be forfeited by
the company.

(c) The employee can opt for conversion of his warrants on the exercise
date by applying to the company’s employee welfare trust.

7.5 Bonus Issue

In the event of a bonus issue of securities being made by the company,

during the period of issue of the warrants and exercise of the option by the
warrant holder, the holder of the warrant shall be entitled to apply for and
be allotted proportionately higher number of shares for each warrant held.

7.6 Option for conversion

(a) The warrant holder may at his discretion opt for conversion during the
exercise period on the exercise date of all the warrants that he has or
some of the warrants.

(b) However, the exercise shall be made in lots of 100 warrants each.

7.7 Transfer of warrants

a) The warrants held by the employee are not transferable except to the
trust during the life of the warrant. During this period, the said

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 warrants cannot be pledged, hypothecated, mortgaged, assigned or in
any other manner alienated or disposed of.

b) However, on the happening of any of the events mentioned in clause

7.1(c), the employee shall forthwith transfer/cause to be transferred
all the warrants held by the trust.

The employee shall enter into a specific agreement with the trust for
the purpose.

7.8 Safe Custody

(a) The employee in whose name the warrants are transferred by the
trust shall enter into an agreement with the trust for keeping these
warrants in safe custody of the trust during the life of the warrant.

(b) At the end of every financial year during the period of custody, the
Trust shall issue a statement showing the number of warrants held in
trust on behalf of the employees.

8. Shares
8.1. Issue of Shares

After the warrants are converted into shares, the shares so converted
shall be subject to the terms, and conditions as mentioned below.

8.2. Ranking of Shares

(a) arising on the conversion of the warrants shall rank pari passu with
all other outstanding equity shares of the Company.

(b) However, any rights attached to these shares shall be with

reference to a date subsequent to the date of allotment.

8.3. Loan for Purchase of Shares

In the event of the employee obtaining loans for purchase/conversion of

the shares either from the Company or from the Trust, he shall comply
with the terms and conditions of the agreement granting the loans.

[Comment: The employee who holds ESOPs, purchases shares at a

predetermined ‘exercise price’. If the company has done well, the employee
may stand to make huge financial gain by selling the shares in the open
market. However, it is possible that the exercise price is too high and the
employee does not have the financial means to purchase the shares.
Therefore, a company can provide a loan to the employee for purchasing the
share, which can be repaid once the employee sells the shares in the market.
While a company cannot generally provide loans for purchase of its own
shares, there is an exception for loans given to employees when they exercise

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 ESOPs.]

9. Tax Liability
(a) In the event of any tax liability arising on account of the issue of the
warrants/conversion into shares/transfer of shares of the employees, the
liability shall be that of the employee alone.

(b) In the event of any tax liability arising on account of ESOP to the Trust, it
shall have the right to cause the shares held by the Trust under this ESOP
to be sold or otherwise alienated to meet the liability on behalf of the
employees.

10. Change in the terms and conditions of the ESOP

The Board of Directors may at any time as its discretion change the terms and
conditions of the ESOP. However, the change shall not be to the detriment of the
warrant holder or the employee who has been allotted/transferred shares under
the ESOP.

11. Confidentiality
(a) The employee who holds any warrants/shares under the ESOP, shall not
divulge the details of the ESOP and his holding to any person except with
the prior permission of the trust obtained in writing.

(b) The employee shall enter into such agreement as the Company/trust may
desire from time to time to more fully and effectively implement this ESOP.

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