NOMINEE DIRECTORS ELIGIBLE FOR ESOPS.
Employee Stock Option (“
ESOP”) is a popular tool used by companies as an incentive for employees.This is particularly true in public listed companies where the stock markets have set a value to the
shares of such company. The scheme pursuant to which the ESOPs are issued is normally referred to
as the Employee Stock Option Scheme (“
ESOS”)In the case of listed companies, the issue of ESOPs is governed by the guidelines laid down by the
Securities and Exchange Board of India (“
SEBI”) as amended from time to time, namely the SEBI(Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 (“
SEBIESOP Guidelines
”)Nominee Directors & ESOPs
By virtue of the Clause 4 of the SEBI ESOP guidelines, employees of any institution nominated as its
representative director on the Board of Directors of any public listed companies (“Nominee
Directors”) and where the investment of such institution in such public listed companies is in excess of
10% of the equity shares of such companies were not eligible for ESOPs.
On August 4, 2008, SEBI amended the SEBI ESOP Guidelines to introduce the following
amendments.
1. A Nominee Directors is eligible to participate in the ESOS of the company, if the contract / agreement
entered into between the nominating institution and the director so appointed specifically provides for
acceptance of ESOS of the company by such Nominee Director and a copy thereof is filed with the
company.
Conditions to be satisfied
A. The contract/ agreement between the institution nominating and the Nominee Director to
specify:
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whether options granted by the company under its ESOS can be accepted by thesaid Nominee Director;
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that ESOPs, if granted to the Nominee Director, shall not be renounced in favour ofthe nominating institution; and
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the conditions subject to which fees, commissions, ESOSs, other incentives, etc.can be accepted by the Nominee Director from the company.
b. A copy of the contract/ agreement is to be filed with the said company, which shall, in turn, file
the copy with all the stock exchanges on which its shares are listed.
C. A copy of the contract/ agreement is to be presented by the Nominee Director at the first
Board meeting of the company attended by him after his nomination.”
2. The accounting treatment prescribed by SEBI, for options granted under graded vesting is to be in
line with the accounting treatment provided by Institute of Chartered Accountants of India (ICAI), in this
regard. The ICAI prescribes the accounting treatment for employee stock options through its Guidance
Note on "Employee Shared Based Payments",that has revised the accounting treatment,
reorganisation and measurement of options granted under graded vesting schedule
The changed accounting treatment has been made effective by substituting clause (c) in Schedule I to
the Guidelines. The substituted clause (c) provides that in case the accounting value of options is
accounted as employee remuneration the amount shall be amortized as under:
Where the Scheme provides for graded vesting:
In case the Scheme provides for graded vesting, either of the following option can be chosen for
amortization:
(a) the vesting period shall be determined separately for each separate vesting portion of the
option, as if the option was, in substance, multiple option and the amount of employee
compensation cost shall be accounted for and amortised accordingly on a straight-line
basis over the vesting period;
or
(b) the amount of employee compensation cost shall be accounted for and amortised on a
straight-line basis over the aggregate vesting period of the entire option (that is, over the
vesting period of the last separately vesting portion of the option). It is, however, provided
that the amount of employee compensation cost recognized at any date at least equals the
fair value4 or the intrinsic value5, as the case may be, of the vested portion of the option at
that date.
Where the Scheme does not provide for graded vesting:
In such a case, the amount shall beamortised on a straight-line basis over the vesting period.
Conclusion
It will be interesting to note that the nominee director's role may now be enhanced as this will truly
serve as an incentive tool to better solution oriented approach in business and not merely armoring
the parent company they represent. The Parent company at the same time shall be more alert to call
back a director who is acting solely guided by his per share value. The tug of war is bound to be
healthy for the corporate ecosystem concerning nominee director
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Tags :Corporate Law
