COMPANY LAW

SWEAT EQUITY ESOP (EMPLOYEE STOCK OPTION PLAN) Click to edit Master subtitle style BUYBACK OF SHARES

4/18/12

PRESENTED BY

JAYWANT BHOPTE RADHESHYAM GUPTA NEHAL VORA AVINASH NAIK RAJKUMAR RAJBHAR
4/18/12

(07) (19) (91) (48) (59) ( )

ANKIT LAD

4/18/12

1st

4/18/12

MEANING OF SWEAT EQUITY

Equity acquired by a company's executives on favorable terms, to reflect the value the executives have added and will continue to add to the company.

4/18/12

TO WHOM SWEAT EQUITY COULD BE ISSUED

According to Companies Secretaries of India the term SWEAT EQUITY indicates Equity shares issued to directors & long time employees who have toiled from the inception of the company to build it with a brand image & thus contributed significantly by their efforts in this direction. While the section mentions only

4/18/12

Principles for issuing Sweat Equity

Sweat equity share is an instrument permitted to be issued by specific companies under sec 79A of Companies Act, 1956 According to this section a public company may issue sweat equity shares of a class of shares already issued if following conditions are satisfied:

4/18/12

Principles

cont.

In case of a company whose equity shares are not listed on any recognized stock exchange, the sweat equity shares are to be issued in accordance with the guidelines as prescribed. All the limitations, restrictions & provisions relating to equity shares are also applicable to such Sweat Equity shares issued under sec 79A. 4/18/12

THE PRICE AT WHICH THE SWEAT EQUITY COULD BE OFFERED shall not be less The SEBI regulations state that the price
than the higher of the following

The average of the weekly high and low of the closing prices of the related equity shares during last six months preceding the relevant date; or The average of the weekly high and low f the closing prices of the related equity shares during the two weeks preceding the relevant date.

The regulations for unlisted companies provide that the price should be fair price calculated by an independent valuer and separate consideration is given for issue of sweat equity in case of consideration other than cash
4/18/12

ADVANTAGES OF SWEAT EQUITY

q

Highly efficacious in extracting the employees efficiency Promotional in nature as it a means of receiving shares without spending money Cost efficient for company as it can save on the employees to be given salary Receiving of sweat equity is a long term investment More income to the employees Receiving the right to participate in the companys management for employees

q q q

4/18/12

Disadvantages of Sweat Equity Shares

q

More of dilution of power as share is being issued Can lead to inefficiency of employees when the feeling of being in power creeps in Can also lead to irregularity in income for the employees Consideration in the nature of share can be heavy on otherwise low income employees During recession or liquidation, the sweat equity share holders may face larger troubles as their effort go nonbenefitted to them.

Excessive issue of sweat equity shares can also lead to overcapitalisation which in turn would be heavy for the company 4/18/12
q

To Conclude
Sweat equity

There is a long debate going on in relation of the issuance of sweat equity by the listed and unlisted companies, at present the issuance by type of companies are governed by different regulations, but it has been advised that to bring the uniformity in the law and to make it simpler for the companies, both of them should be governed by similar laws.

4/18/12

2 nd

4/18/12

DEFINITIONS

Section 2(15A): Employee Stock Option

4/18/12

OBJECTIVES OF ESOP
q q q q q

Attracting critical skills Employee feeling of ownership and commitment Creating additional wealth for employees A method to supplement social security benefits To retain employees or groups apprehended of high turnover To introduce a performance management system without incurring full cash out flow

As a possible hedge against hostile controlling interest 4/18/12

q

Different Types of ESOP

Employee Stock Option Scheme

4/18/12

Types Cont..
Share Appreciation Rights (SAR)/ Phantom Shares:
Under this scheme, no shares are offered or allotted to the employee. The employee is given the appreciation in the value of shares between two specified dates as an incentive or performance bonus, that is linked to the performance of the company as a whole, as reflected in its share value.

4/18/12

Salient Features of ESOP

4/18/12

An option is given to employees to acquire

UNDERLYING PROCEDURE AND APPLICATION OF ESOP

He should be an Employee

4/18/12

Various Stages in ESOP

Grant it means issue of stock options to employees under ESOP. The employees may be required to pay an upfront amount at time of grant of options, depending upon the provisions of the scheme framed by the company. The said amount is adjusted when the shares are allotted on exercise of option. Vesting- Vesting means the process by which the employee gets the right to apply for and be issued shares of the company under the options granted to him. Till the vesting takes place, the employee does not have right to apply for the companys shares. Upon vesting, the employee gets an unfettered right to apply for the issue of shares. Vesting Period- it means the period during which the vesting of the options granted to an employee takes place. The SEBI guidelines provide that the vesting period shall not be less than one year from the date of grant of options.

4/18/12

Vesting percentage- it refers to that portion of the total options granted, which an employee is eligible to exercise. In other words, vesting of the entire lot of options granted can take place either in one stokes at the completion of a fixed period or it can be staggered or phased vesting. Exercise period- it means the time period after vesting within which the employee should exercise his right to apply for the 4/18/12 shares, otherwise the vested options would

ESOP Procedural Flowchart

Drafting of ESOP Scheme
Consideration of ESOP Scheme by Board & proposing constitution of Compensation Committee (CC) Consideration of ESOP Click to edit Scheme in EGM & authorisation for Constitution of CC. Convey allotment to CC intimating allotment to Concerned Employee

Hold BM for allotment of Shares

Entry into Register of Members Reporting to: ROC RBI, if applicable

Employees exercising options fwdng application to CC

Master subtitle style

Communicate Vesting period Acceptance of Grant

Meeting of CC determination of eligibility criteria, 4/18/12 price, exercise

Communicate Grant of options to Employees

Shareholders Approval
n

4/18/12

By way of Special Resolution in a general meeting

Advantages Awareness of company success

4/18/12

ADVANTAGES, DISADVANTAGES OF ESOP

BUYBACK OF SHARES

4/18/12

Buy Back ?
The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buyback shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake. A buyback is a method for company to invest in itself since they can't own themselves. Thus, buybacks reduce the number of shares outstanding on the market which increases the proportion of shares the company owns.

4/18/12

Sections

The provisions regulating buy back of shares are contained in Section 77A, 77AA and 77B of the Companies Act,1956. These were inserted by the Companies (Amendment) Act,1999. The Securities and Exchange Board of India (SEBI) framed the SEBI (Buy Back of Securities) Regulations,1999 and the Department of Company Affairs framed the Private Limited Company and Unlisted Public company (Buy Back of Securities) rules,1999 pursuant to Section 77A(2)(f) and (g) respectively.
4/18/12

Objectives

To increase promoters holding Increase earning per share Rationalize the capital structure by writing off capital not represented by available assets. Support share value To pay surplus cash not required by business In fact the best strategy to maintain the share price in a bear run is to buy back the shares from the open market at a premium over the prevailing market price.
4/18/12

Resources of Buy Back

A Company can purchase its own shares from free reserves; Where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve and details of such transfer shall be disclosed in the balance-sheet or securities premium account; or proceeds of any shares or other specified securities. A Company cannot buyback its shares or other specified securities out of the proceeds of an earlier issue of the same kind of shares or specified securities.

4/18/12

Conditions

The buy-back is authorized by the Articles of association of the Company; A special resolution has been passed in the general meeting of the company authorizing the buy-back. In the case of a listed company, this approval is required by means of a postal ballot. Also, the shares for buy back should be free from lock in period/non transferability. The buy back can be made by a Board resolution If the quantity of buyback is or less than ten(10%) percent of the paid up capital and free reserves;

4/18/12

Cont

The buy-back is of less than twenty-five(25%) per cent of the total paid-up capital and fee reserves of the company and that the buy-back of equity shares in any financial year shall not exceed twenty-five(25%) per cent of its total paid-up equity capital in that financial year; The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back;
4/18/12

Conditions

continue

There has been no default in any of the following in repayment of deposit or interest payable thereon, redemption of debentures, or preference shares or payment of dividend, if declared, to all shareholders within the stipulated time of 30 days from the date of declaration of dividend or repayment of any term loan or interest payable thereon to any financial institution or bank; There has been no default in complying with the provisions of filing of Annual Return, Payment of Dividend, and form and contents of Annual Accounts;
4/18/12

All the shares or other specified securities for buyback are fully paid-up; The buy-back of the shares or other specified securities listed on any recognized stock exchange shall be in accordance with the regulations made by the Securities and Exchange Board of India in this behalf; and The buy-back in respect of shares or other specified securities of private and closely held companies is in accordance with the guidelines as may be prescribed.
4/18/12

Sources from where the shares will be purchased

The securities can be bought back from

existing security-holders on a proportionate basis; Buyback of shares may be made by a tender offer through a letter of offer from the holders of shares of the company or the open market through book building process; stock exchanges

4/18/12

Cont..

odd lots, that is to say, where the lot of securities of a public company, whose shares are listed on a recognized stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

4/18/12

Procedure

Where a company proposes to buy back its shares, it shall, after passing of the special/Board resolution make a public announcement at least one English National Daily, one Hindi National daily and Regional Language Daily at the place where the registered office of the company is situated. The public announcement shall specify a date, which shall be "specified date" for the purpose of determining the names of shareholders to whom the letter of offer has to be sent. A public notice shall be given containing disclosures as specified in Schedule I of the SEBI regulations.

A draft letter of offer shall be filed with SEBI through a merchant Banker. The letter of offer shall then be dispatched to the 4/18/12 members of the company.

Procedure

continue

A copy of the Board resolution authorizing the buy back shall be filed with the SEBI and stock exchanges. The date of opening of the offer shall not be earlier than seven days or later than 30 days after the specified date The buy back offer shall remain open for a period of not less than 15 days and not more than 30 days. A company opting for buy back through the public offer or tender offer shall open an escrow Account.
4/18/12

Penalty

If a company makes default in complying with the provisions the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both. The offences are, of course compoundable under Section 621A of the Companies Act,1956.

4/18/12

Issue of further shares after Buy back

Every buy-back shall be completed within twelve (12) months from the date of passing the special resolution or Board resolution as the case may be. A company which has bought back any security cannot make any issue of the same kind of securities in any manner whether by way of public issue, rights issue up to six(6) months from the date of completion of buy back.

4/18/12

SHARE BUY-BACK: POSITIVE ASPECTS

It could enable a company to achieve its desired capital structure more quickly or facilitate a major restructuring. It could avert a hostile takeover bid by reducing the number of shares in circulation

4/18/12

Market generally interprets buy-back as a positive aspect Shareholders have a choice of deciding whether or not to receive the payout by selling or holding their shares, unlike a dividend payout. Returning excess cash by way of a share buy-back gives a company greater flexibility with regard to its dividend policy

4/18/12

SHARE BUY-BACK: NEGATIVE ASPECTS

Re-purchase of its own shares may conversely have a negative signaling effect. Management may not seek to utilize any existing excess cash effectively

4/18/12

Possible mismanagements may arise ifToo high a price is paid for the re-purchased shares or if Cash resources are eroded to the level that could give rise to a risk of insolvency. A return of funds by way of a share buy-back is less certain than an annual dividend stream.

4/18/12

CASE OF SUCCESSFUL BUYBACK

GLAXOSMITHKLINE Consumer Healthcare Ltd.

Sellers of Horlicks, Boost, Crocin, Iodex and many others Made an open offer to buyback during March 2005 Offered to buy 3.3 Mn

At Rs 370/Share, not exceeding 123 Cr in 4/18/12 value

REASONS FOR BUYBACK

Promoters holding would increase from 39.99% to 43.16% Had excess reserves with no major expansion plans Wanted to use its reserves instead of keeping it idle Felt share was undervalued FMCG industry in that period had limited growth plans Thus 4/18/12 Britannia, Godrej and HUL all came

SUCCESS OF BUYBACK

Received more than double the required offers (7.8 Mn) Bought back using proportional acceptance method
Pre Buy back Dec 04 Net Worth(Rs Lacs) Return on Net Worth Earning Per share(Rs) Book value Per share(Rs) P/E 599,35.17 13.82% 16.12 116.65 20.50 Post Buy back Dec 05 47511.18 22.55% 25.48 96.62 24

4/18/12

CASE OF UNSUCCESSFUL BUYBACK

INDIAN RAYON

Is into the garment business, it is an AV Birla Group Company Announced buyback in 1999 Buyback of 25% equity share capital Price offered was in the range Rs 75-85 Intended cash outflow Rs 127-144 Cr
4/18/12

REASONS FOR BUYBACK

To increase promoters stake from 21.5% to 28.7% Working at below capacity and no major Capex planned Wanted to add value to share holders by returning capital to them Cement business was hived off to Grasim Buyback would give investors an exit 4/18/12 route

CONCLUSION

Buybacks should be used as an opportunity to exit only when there is concern over a companys prospects or when the post-buyback free float is expected to shrink considerably. In most other cases, buybacks do offer the lure of an immediate benefitbut you might be better off as a residual shareholder, and gain from a hike in the share of assets and profits of the business.
4/18/12

You

THANK YOU
4/18/12