✔ Meaning of Employee Stock Option
Employees’ stock option means the option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price.

☞ ESOS provides right but not obligation to subscribe
ESOS carry the right, but not the obligation, to buy a certain amount of shares in the company at a predetermined price for a certain number of years (option period).

☞ Meaning of ESOS price
The fixed price is called the ‘grant’ or ‘strike’ or ‘exercise’ price and is typically the market value/fair value of the shares on the date of grant. Since the grant price remains fixed over the term of the option, the employee expects that the share price would increase and he would gain by exercising his option at a lower price.

☞ Why shares are issued under ESOS?
The idea behind stock options is to align incentives between the employees and shareholders of a company. Shareholders want to see the stock appreciate, so rewarding employees when the stock goes up ensures, in theory that everyone is striving for the same goals. Critics point out, however, that there is a big
difference between an option and the ownership of the underlying stock. If the stock goes down, the holder of an option would lose the opportunity for a bonus, but wouldn’t feel the same pain as the owner of the stock. This is especially true with employee stock options because they are often granted without any cash outlay from the employee.

☞ What are ESOPs?
An Employee Stock Option Plan is when the company offers its shares to the employees. An ESOP is nothing but an option to buy the company’s share at a certain price. Under this plan, companies provide employees a plan by which the employees get an option to acquire shares of their employer company over a period of time at a reduced price or nil price. Therefore, ESOP is primarily a kind of incentive to hold the employees to the company’s fold.

✔ Procedure for Issue of  ESOP employee stock options  by Company

Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 provides that for the purposes of clause (b) of sub-section (1) of section 62, a company, other than a listed company which is not required to comply with SEBI ESOP Guidelines shall not offer shares to its employees under a scheme of employees
stock option (hereinafter referred to as “ESOS”), unless it complies with the following requirements:

(1) The issue of ESOS has been approved by the shareholders of the company by passing a special resolution.

Explanation: For the purposes of clause (b) of sub-section (1) of section 62 and this rule Employee means—

(a) a permanent employee of the company who has been working in India or outside India; or

(b) a director of the company, whether a whole-time director or not, but excluding independent director; or

(c) an employee as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company  but does not include—
(i) an employee who is a promoter or a person belonging to the promoter group; or

(ii) a director who either himself or through his relative or through anybody corporate, directly or indirectly, holds more than 10%of the outstanding equity shares of the company:

Provided that in case of a start-up company, as defined in notification number [GSR 127(E), dated 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade], Ministry of Commerce and Industry Government of India, Government of India, the conditions mentioned in sub-clause (i) and (ii) shall not apply upto ten years from
the date of its incorporation or registration.

(2) The company shall make the following disclosures in the explanatory statement annexed to the notice for passing of the resolution:
(a) the total number of stock options to be granted;
(b) identification of classes of employees entitled to participate in the ESOS;
(c) the appraisal process for determining the eligibility of employees to the ESOS;
(d) requirements of vesting and period of vesting;
(e) maximum period within which the options shall be vested;
(f) exercise price and the formula for arriving at the same;
(g) exercise period and process of exercise;
(h) Lock-in period, if any;
(i) maximum number of options to be granted per employee and in aggregate;
(j) the method which the company shall use to value its options;
(k) the conditions under which option vested in employees may lapse e.g. in case of termination of employment for misconduct;
(l) the specified time period within which the employee shall exercise the vested options in the event of a proposed termination of employment or resignation of employee; and
(m) a statement to the effect that the company shall comply with the applicable accounting standards.
(3) The companies granting option to its employees pursuant to ESOS will have the freedom to  determine the exercise price in conformity with the applicable accounting policies, if any.
(4) Approval of shareholders by way of separate resolution shall be obtained by the company in case of:
(a) grant of option to employees of subsidiary or holding company; or
(b) grant of option to identified employees, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of option.
(5) (a) The company may by special resolution, vary the terms of ESOS not yet exercised by the employees provided such variation is not prejudicial to the interests of the option holders.
(b) The notice for passing special resolution for variation of terms of ESOS shall disclose full details of the variation, the rationale therefor, and the details of the employees who are beneficiaries of such variation.

(6) (a) There shall be a minimum period of one year between the grant of options and vesting of option:

Provided that in a case where options are granted by a company under its ESOS in lieu of options held by the same person under an ESOS in another company, which has merged or amalgamated with the first mentioned company, the period during which the options granted by the merging or amalgamating were held by him shall be adjusted against the minimum
vesting period required under this clause.

(b) The company shall have the freedom to specify the lock-in period for the shares issued pursuant to exercise of option.
(c) The Employees shall not have right to receive any dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to them, till shares are issued on exercise of option.

(7) The amount, if any, payable by the employees, at the time of grant of options:—
(a) may be forfeited by the company if the option is not exercised by the employees within the exercise period; or
(b) the amount may be refunded to the employees if the options are not vested due to non-fulfilment of conditions relating to vesting of option as per the ESOS.

(8) (a) Option granted to employees shall not be transferable to any other person.
(b) The option granted to the employees shall not be pledged, hypothecated, mortgaged or otherwise encumbered or alienated in any other manner.
(c) Subject to clause (d) below, no person other than the employees to whom the option is granted shall be entitled to exercise the option.
(d) In the event of the death of employee while in employment, all the options granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.
(e) In case the employee suffers a permanent incapacity while in employment, all the options granted to him as on the date of permanent incapacitation, shall vest in him on that day.
(f) In the event of resignation or termination of employment, all options not vested in the employee as on that day shall expire. However, the employee can exercise the options granted to him within the period specified in this behalf, subject to the terms and conditions under the scheme granting such options as approved by the Board.

(9) The Board of directors, shall, inter alia, disclose in the Directors Report, for the year the following details of the ESOS:
(a) options granted;
(b) options vested;
(c) options exercised;
(d) the total number of shares arising as a result of exercise of option;
(e) options lapsed;
(f) the exercise price;
(g) variation of terms of options;
(h) money realized by exercise of options;
(i) total number of options in force;
(j) employee wise details of options granted to:—

(i) key managerial personnel;
(ii) any other employee who receives a grant in any one year of option amounting to 5% or more of option granted during that year.
(iii) identified employees who were granted option, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant;

(10) (a) The company shall maintain a Register of Employee Stock Options in Form SH-6 and shall forthwith enter therein the particulars of option granted under clause (b) of sub-section (1) of section 62.
(b) The Register of Employee Stock Options shall be maintained at the registered office of the company or such other place as the Board may decide.
(c) Entries in the register shall be authenticated by the Company Secretary of the company or by any other person authorized by the Board for the purpose.

(11) Where the equity shares of the company are listed on a recognised stock exchange, the ESOS shall be issued, in accordance with the regulations made by the SEBI in this behalf.