SEBI (ESO Scheme & ESP

Scheme) Guidelines, 1999

 S. 63 (2013)
 ‘A’ - 200 shares
 Co. declares 4:1 bonus
 Every one share - gets 4
shares
 800 shares
 Total holding – 1000
 Bonus Shares
See Rule 39 & 40 – Sch. I, CA, 2013
 Additional Shares - Issued to - Existing SH’s (Holding
Parent Shares)
 Without receiving any amount from SH’s.
 Want of liquid resources ?
 Shall not be paid in cash?
 Conversion of a Co’s equity reserves / surplus to SC
 Allotted by capitalization of reserves / surplus
(Capitalization of Co’s Profits)
 Issued proportionately to the SH’ing
Share prices increases after BS are distributed?
Value of Earnings Per Share (EPS) will go down?
Reduced share price
Increase in - Trading Volume?**
 Issue of Bonus Shares - S. 63 (2013) – (1) Co. may issue

P… no issue of BS shall be made by capitalizing reserves

created by the revaluation of assets.
 Advantages / Benefits of Bonus Shares
When SH receives dividend in cash &
Tax benefits adds to the income & is taxed as a
usual IT when received in cash
Increases the wealth of Can sell the shares when
SH requires cash.
Indication of higher  Because it is always issued when its
future profits earnings are expected to increase

SH is entitled to receive more

Increased shares &
dividends to the increased shares in
Dividends
the account
Perceived highly / positively in the
High Psychological
market – creates high demand for
Value
shares of Co.
Conditions – Sec. 63(2)
 63 (2) & (3)

 (3) Shall not be issued in lieu of dividend

 Sweat Equity Shares – Sec. 2 (88) R/W Sec. 54
(Old - Sec. 79 A – Expl. II)
 Allows - Co. to retain - Employees by rewarding them
for their services?
 Equity shares as are issued
To its directors / employees
At a discount / for consideration other than cash
 Sweat Equity Shares
Rule 8(1) - Expl. (ii) - Co’s (Share Capital & Debentures)
Rules, 2014
 Issue of Sweat Equity Shares –
S. 54 - 2013 (OL - 79A)
 Rights – Limitations - Restrictions & Provisions?
 Rank pari passu with other equity SH’s
 Conditions
 Issue SES of a class of shares already issued
 Authorised by a Spl. Res.
 Not less than 1 year has elapsed - (date on which the
Co. had commenced business)
 SES… are issued If

2(b) ‘Associate’ includes a person

(i) Who directly / indirectly by himself / in combination with
relatives, exercise control over the Co.; /
(ii) Whose employee, officer / director is also a director, officer /
employee of Co.
2(d) ‘Control’ *
 SES…
 2(g) ‘Employee’ means -
 (i) A permanent employee of Co. working in India /
abroad; /
 (ii) A director of Co. whether a WTD / not;
 Rule 8(1) - Expl. (i) - Co’s (SC & Debentures) Rules,
2014
 A Permanent Employee… who has been working in
India / outside India, for at least last one year; /
 A director… whether a WTD / not; /
 An employee / a director as defined in S. Cl. (a) / (b)
above
Of a subsidiary, in India / outside India / of a HC
of SC;
 Reg 3 - 5
 R. 3 - Nothing contained in T/Reg. shall apply to
an unlisted Co.;
 P… unlisted Co. coming out with IPO & seeking
listing of its securities on SE, pursuant to issue
of SES
Shall comply with SEBI (DIP) Guidelines,
2000 (SEBI (ICDR) Reg. 2009)
 Chapter II - Reg. 4
 A Co. whose ES are listed on a RSE may issue
SES in accordance with Sec. 79A, CA, 1956 &
T/ Reg. to its – To employee & Promoter
 Reg 3 - 5
 Spl. Res. Reg. 5
 (1) For T/P/ of passing a Spl. Res. U/S 79(1)(a),
CA, 1956
 Explanatory statement to be annexed to the
notice for GM pursuant to S 173, CA, 1956
 Shall contain disclosures as specified in the Sch.
 (2) Issue of SES to Promoters shall be subject to
the requirements specified in Reg. 6
 Reg. 6 -
 (1) Shall also be approved by simple majority of SH’s
in GM;
 P… for passing such Res. - Voting through postal ballot
as specified U/C (Passing of the Res. by Postal Ballot)
Rules, 2001 shall also be adopted;
 P… Promoters to whom such SES are proposed to be
issued shall not participate in such resolution.
 (2) Each transaction of issue of SES be voted by a
separate Res.
 (3) Res. for issue of SES shall be valid for a period of
not more than 12 months from the date of passing of
Res.
 (4) … Explanatory statement shall contain - Disclosures
as specified in the Sch.
Sch. - Explanatory statement Contain the following information:
Explanatory Statement
 Pricing of SES – Reg. 7
(1) Price of SES shall not be less than the higher of the
following:

Expl: “Relevant Date” - Means - Date which is 30 days prior to

date on which GM is convened, in terms of S. 79A (1) (a), CA.
(2) If - Shares are listed on > Price on SE shall be
one SE, but quoted only on considered
one SE on given date

SE where there is highest

(3) Share price is quoted on trading volume during that
> one SE date shall be considered

Share Price on the next

(4) Shares are not quoted on
trading day shall be
the given date
considered.
 Valuation of IP - Reg.8
 (1) Valuation of IPR’s / of know-how provided /
other value addition… shall be carried out by a
MB.
 (2) MB may consult - Experts & valuers… may
deem fit having regard to
 Nature of Industry &
 Nature of Property /
 Other value addition.
 (3) MB - Shall obtain a certificate from an
independent CA that - Valuation of IP / other
value addition is in accordance with the relevant
accounting standards.
 Accounting Treatment Reg. 9
 (1) Where SES are issued for a non-cash consideration,
such non-cash consideration shall be treated in the
following manner in the books of account of Co.:-
 (a) Where non-cash consideration takes the
form of a depreciable / amortizable asset*,
 it shall be carried to the balance sheet of the
Co. I/A/W - relevant accounting standards; /
 (Spreading an intangible asset’s cost over that
asset’s useful life)*
 (b) Where Cl. (a) is not applicable, it shall be
expensed as provided in the relevant accounting
standards.
 Placing of Auditors Certificate before AGM – Reg. 10

In GM subsequent to - issue of SES –

BOD shall place before SH’s - Certificate
from Auditors of Co.
That the issue of SES has been made in
accordance with – Reg.’s & Res. Passed…
authorizing the issue of such SES.
 Ceiling on Managerial Remuneration – Reg. 11

 Amount of SES issued shall be treated as part of

managerial remuneration for the purpose of SS
198, 309, 310, 311 & 387, CA, 1956, (S. 197, CA
2013) if the following conditions are fulfilled:
(i) SES are issued to any director /
manager;
(ii) Issued for non cash consideration,
which does not take the form of an asset
which can be carried to the balance sheet
of the Co. I/A/W - relevant accounting
standards.
 Lock-in of SES - Reg.12
 (1) Shall be locked in for a period of 3 years
from the date of allotment.
 (2) SEBI (DIP) Guidelines, 2000 (ICDR, 2009) on
public issue in terms of lock-in & computation of
promoters’ contribution
Shall apply - if a Co. makes a public issue after it has
issued SES.
 Listing – Reg. 13
 SES issued by a listed Co. shall be eligible for listing
only if such issues are in accordance with T/Reg’s
 Applicability of Takeover Reg. 14
 Any acquisition of SES shall be subject to the provision
of SEBI (SAST) Reg. 1997 (SEBI (SAST) 2011)
 SES…
Chapter III – General Obligations
Reg. 15 Obligations of the Co.
Reg. 16 Action against intermediaries
Chapter IV - Penalties & Procedure

Reg. 17 Power of SEBI to order inspection /

investigation
Reg. 18 Duty to produce records etc

Reg. 19 Submission of Report to SEBI

Reg. 20 Power of SEBI to Issue directions

 Employees Stock Option Plan (ESOP - Sec. 2 (37))
& Employee Stock Purchase Scheme (ESPS)
 2(h) ‘ESOS’ means - An ESOS as defined in SEBI
(ESOS & ESPS) Guidelines, 1999;
 ESOP Means the option given to
Directors - Officers / Employees of a Co. /
of its HC / Sub. Co. / Co’s, If any -
 Which gives… the benefit / right to purchase, / TO
SUBSCRIBE FOR - the shares of the Co.
At a future date at a Pre-determined price;
 Employee does not exercise the option within a
time prescribed by Co. - Option automatically
expires.
 Non-cash compensation - to compete for the best
human resources.
 Gives an opportunity to corporate to pay
without a reduction in book profits (accounting
advantage)
No ESOS can be offered to employees of a
Co. unless SH’s of Co. - Approve ESOS by
Passing a Spl. Res.
(5) Exercise – Means
Making of an application by employee to the
Co. for issue of shares against option vested in
him in pursuance of the ESOS.
(6) “Exercise period – Means
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 ESOS.
 (7) Exercise price – Means
 Price payable by - Employee for exercising option
granted to him in pursuance of ESOS.
 (11) Option grantee - Means
 An employee having right but not an obligation to
exercise in pursuance of ESOS.
 (8) Grant – Means
 Issue of option to employees U/ ESOS.
 (7a) Fair value of an option – Means
 Fair value calculated in accordance with Sch. III
 (9a) Intrinsic value – Means
 Excess of the market price of the share U/ ESOS over
the exercise price of the option (including up-front
payment, if any)
 (10) Market price – Means
Latest available closing price,
Prior to the date of meeting of BOD in which
options are granted / shares are issued,
On SE on which - Shares of Co. are listed.
 If the shares are listed on more than one SE,
then SE where there is highest trading volume
on the said date shall be considered.
 4. Eligibility to participate in ESOS
 4.1 An employee shall be eligible to participate in ESOS of Co.
 Explanation:
 Where such employee is a director nominated by an
institution as its representative on BOD of the Co. –
 (i) Contract / agreement entered into between the institution
nominating its employee as director of a Co. & director so
appointed shall, inter-alia, specify the following:
 (a) Whether options granted by Co. under its ESOS can be
accepted by the said employee in his capacity as director of
Co.;
 (b) that options, if granted to director, shall not be renounced
in favour of nominating institution; &
 (c) Conditions subject to which fees, commissions, ESOSs,
other incentives, etc. can be accepted by director from Co.
 4. Eligibility to participate in ESOS
(ii) Institution nominating its employee as
a director of a Co.
Shall file a copy of the contract / agreement
with the said Co.,
Which shall, in turn, file the copy with all
SE’s on which its shares are listed.
(iii) Director so appointed
Shall furnish a copy of the contract/
agreement at 1st BOD meeting of Co.
attended by him after his nomination.
 Not be eligible
4.2 - An employee who is
Promoter / belongs to the Promoter
group shall not be eligible
4.3
Director directly / indirectly holds more
than 10% of the outstanding equity
shares*
 5. Compensation Committee
CC shall be a Committee of BOD’s
consisting of a majority of Independent
Directors.
Formulate the detailed terms & conditions
of ESOS
6. Approve ESOS by passing a Spl. Res.
Co. shall not vary the terms of ESOS in
any manner, which may be detrimental to
the interests of the employees.
 ESOP Advantages
 9. Lock-in period & rights of the option-holder
Minimum period of one year between the
grant of options & vesting of option.
 9.3 – Right to a sses
Employee shall not have right to receive any
dividend / to vote / in any manner enjoy the
benefits of a SH
In respect of option granted to him - Till shares
are issued on exercise of option.
 BOD shall, inter alia, disclose
Either in Directors’ Report / in the annexure to the
Directors’ Report
 10. Consequence of failure to exercise option:
 10.1 - Amount payable by the employee, if any,
at the time of grant of option;-
(a) May be forfeited by the Co. if the option is not
exercised by the employee within the exercise
period; /
(b) 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 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.
ESPP
 (4) ESPP -
 ESPP a scheme under which Co. offers shares to
employees as part of a public issue / otherwise
 Allow employees to use their salary to purchase the
stock of Co., usually at a discounted price
 Holders do not have any option - But are mandated to
pay the exercise price usually by way of monthly
deductions from their salary
Part of a public issue – Shares issued to employees at the
same price as in the public issue - ESPS shall not be
subject to any lock-in.
Lock-in period – one year Lock-in period – one year
ESOP Sell shares - From - Date ESPP - From - Date of
of the grant for ESOP’s allotment of Shares.
 16. Eligibility to participate in ESPS:
 An employee shall be eligible to participate in the ESPS (16.1)
 An employee who is a promoter / belongs to the promoter group
shall not be eligible to participate in the ESPS (16.2)
 A director who either by himself / through his relatives / through
any body corporate,
 Directly / indirectly holds more than 10% of the outstanding
equity shares… - Shall not be eligible to participate in ESPS
(16.3)
 17 - Shareholder Approval:
 No ESPS shall be offered to employees… Unless – approve… by
passing Spl. Res. in the meeting. (17.1)
 Explanatory statement to the notice shall specify the details
(17.2)
 Pricing & Lock-in (18)
 Disclosure & Accounting Policies (19)
 Conditions
(a) Total No. of options to be granted;
(b) Identification of classes of employees entitled to participate in ESOS
(c) Requirements of vesting & period of vesting;

(d) Maximum period (Sub. to cl. 9.1) within which the options shall be vested;

(e) Exercise price / pricing formula;

(f) Exercise period & process of exercise;

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

(h) Maximum No. of options to be issued per employee & in aggregate;

(i) Statement to the effect that - Co. shall conform to the accounting policies

(j) Method which Co. shall use to value its options whether fair value /

intrinsic value
 CIT, Bangalore v Infosys Technologies Ltd., (2008) 2 SCC
272, JJ. S.H. Kapadia & B. Sudarshan Reddy
 Additional CIT v Bharat V. Patel, 2018 Indlaw SC 240
 https://www.casemine.com/judgement/in/5b49fd9f9eff431
c29b655d9

 M. Seethapathy Rao v UOI, 2018 Indlaw KAR 5117*

(Condonation of Delay)
 CIT v A. K. Khosla, 2010 Indlaw MAD 1486
 CEO – Received Rs. 22,00,000/- as non-compete fee after his
retirement - Claimed exemption as it was of capital nature
 Whether any lump sum amount received from the employer
by the employee on / after cessation of his employment would
be profits in lieu of salary? (S. 17(3)(i), IT Act, 1961)
 Was paid for restraining - Assessee from engaging in gainful
• Bharat V. Patel  The revenue argued that the amount received on redemption of SARs should be taxed as
salary since they were perquisites under Section 17(2). They contended that the amount was received by
the Assessee as an employee during the subsistence of an employer-employee relationship and, hence,
the amount so received must be treated as taxable salaries. The tax authorities relied on the
judgment[3] of the ITAT Special Bench wherein it was held that the amount received on redemption of
SARs was a revenue receipt liable to tax as ‘income from salaries’, since the nature of the payment is
primarily a deferred wage or bonus payment in cash or otherwise.
• The Assessee on the other hand contended that the amount received from redemption of SARs can only
be treated as ‘capital gains’. He also contended that he did not pay anything to acquire SARs. The Assessee
also relied on an earlier SC judgment[4], which held that a benefit received by a person is not taxable as
income unless the legislature makes the same taxable. The intention behind amending Section 17(2) of the
legislature was to bring the benefits transferred by the employer to the employees by offering stock
options within the ambit of tax. Through this amendment, direct or indirect transfer of specified securities
from the employer to the employees have been covered with effect from April 1, 2000. Said provisions
would not apply to the instant case since the transactions took place before April 1, 2000.
• In the absence of any express statutory provision regarding the applicability of the amendment
retrospectively, it cannot be applied for an earlier period.
• It is a well-established rule of interpretation that taxing provisions shall be construed strictly so that no
person who is otherwise not liable to pay tax, be made liable to pay tax.
• The amount received upon the redemption of SARs could not be treated as benefits or perquisites arising
from the exercise of a business or profession, since the applicability of the provision is confined to cases
where there is any business or profession-related transaction involved. In the instant case, no such
transaction was involved.
• CIT, Bangalore v Infosys Technologies Ltd
• Respondent-assessee is public limited IT company based in Bangalore. To implement Employees Stock Option Scheme
(ESOP), the assessee created a Trust known as Technologies Employees Welfare Trust and allotted 7,50,000 warrants at Re.
1/- each to the said Trust. Each warrant entitled the Holder thereof to apply for and be allotted one equity share of the face
value of Rs. 10/- each for total consideration of Rs. 100/-. The Trust was to hold the warrant and transfer the same to the
employees of the company under the Terms and Conditions of the scheme governing ESOP. During the assessment years
1997-98, 1998-99 and 1999-2000, warrants were offered to the eligible employees at Re. 1/- each by the Trust. They were
issued to employees based on their performance, security and other criteria. Under the ESOP Scheme, every warrant had to
be retained for a minimum period of 1 year. At the end of that period, the employee was entitled to elect and obtain shares
allotted to him on payment of the balance Rs. 99. The option could be exercised at any time after 12 months but before
expiry of the period of 5 years. The allotted shares were subject to a lock in period. During the lock in period, the custody of
shares remained with the Trust. The shares were non-transferable. The employee had to continue to be in service for 5
years. If he resigned or if his services be terminated for any reason, he lost his right under the scheme and the shares were
to be re- transferred to the Trust for Rs. 100 per share. Intimation was also given to BSE that 734500 equity shares were
non- transferable and would not constitute good delivery. Till 13.9.1999 all the shares were stamped with the remark non-
transferable. Thus the said shares were incapable of being converted into money during the lock in period.
• 3. For the assessment year 1999-2000, the AO held that the total amount paid by the employees consequent to the
exercise of option was Rs. 6.64 crores whereas the market value of those shares was Rs. 171 crores. He held that the
perquisite value was the difference between the market value and the price paid by the employees for exercise of the
option. He, therefore, treated Rs. 165 crores as perquisite value on which TDS was charged at 30%. It was held that the
respondent-assessee was a defaulter for not deducting TDS under Section 192 amounting to Rs. 49.52 crores on the above
perquisite value of Rs. 165 crores. Similar orders were also passed by the AO for assessment years 1997-98 and 1998-99.
These orders were confirmed by CIT(A). No weightage was given by both the authorities to the lock in period. Both the
authorities took into account the perquisite value as on the date of exercise of option.
• Whether tax had to be deducted under Section 192 of the 1961 Act, by the respondent-assessee, on the amount earned by
its employees from exercise of stock option granted to them by the company through the Trust, is the question which arises
for determination in these civil appeals.
• the Department had erred in treating the respondent herein as an assessee in default for not deducting the TDS at 30% as
stated in the order of assessment. This is not the case of tax evasion. The assessee had floated the Trust because of the buy
back problems, which were genuine problems in cases where the employees stood dismissed, removed or in the case of
resignation in which cases they were required to return the allotment.