Amendment to SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 - SEBI - SEBI/PMD/MBD/ESOP/2/2003/30/06

SECURITIES AND EXCHANGE BOARD OF INDIA PRIMARY MARKET DEPARTMENT SEBI/PMD/MBD/ESOP/2/2003/30/06 June 30 , 2003 To All Registered Merchant Bankers Dear Sirs, Sub: Amendment to SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 were notified and came into effect from 19th June, 1999. Due to various developments in the market since 1999 and various representations/ clarifications sought by the companies, SEBI set up a Committee under the Chairmanship of Prof. J. R. Varma to review the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. The recommendations of the Committee were made available at SEBI Website for receipt of public comments. The Board, after considering the recommendations of the Committee and the public comments, has approved certain modifications to be incorporated in captioned Guidelines. Accordingly, the amendments to the captioned Guidelines have been made in exercise of powers conferred under section 11(1) of SEBI Act, 1992. The amendments are enclosed. You are directed to ensure compliance with the Guidelines. These amendments except clauses 22.3 and 22.6 shall come into force with immediate effect. Clauses 22.3 and 22.6 shall come into force on the date/s specified by the Board. The amended guidelines are also available in SEBI website i.e. www.sebi.gov.in Yours faithfully, Sd/- (Neelam Bhardwaj) Deputy General Manager Primary Market Department Tel. (Board): 22850451-56, 22880962-70(Extn. 367) Tel. (Direct: 22842826 email: [email protected] Fax: 22045633 AMENDMENTS TO SEBI (EMPLOYEE STOCK OPTION SCHEME AND EMPLOYEE STOCK PURCHASE SCHEME) GUIDELINES, 1999 (1) In clause 2.1, ( i ) after sub-clause (2), the following shall be inserted, namely- (2A) employee stock option means the option given to the whole-time Directors, Officers or employees of a company which gives such Directors, Officers or employees, the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price. ( ii ) for sub-clause (3) following shall be substituted, namely- (3) employee stock option scheme (ESOS) means a scheme under which a company grants employee stock option. ( iii ) after sub-clause (4), the following shall be inserted, namely- ( 4a ) ESOS shares means shares arising out of exercise of options granted under ESOS. ( 4b ) ESPS shares means shares arising out of grant of shares under ESPS. ( iv ) after sub-clause (7), the following shall be inserted, namely- ( 7a ) fair value of an option means the fair value calculated in accordance with Schedule III. ( v ) after sub-clause (9), the following shall be inserted, namely- ( 9a ) intrinsic value means the excess of the market price of the share at the date of grant of the option under ESOS over the exercise price of the option (including up-front payment, if any). ( vi ) for sub-clause (10), following shall be substituted, namely- (10) market price of a share on a given date means the average of the two weeks high and low price of the share preceding the date of grant of option on the stock exchange on which the shares of the company are listed. If the shares are listed on more than one stock exchange, then the stock exchange where there is highest trading volume during the aforesaid period should be considered. ( vii ) for sub-clause ( 11 ), following shall be substituted, namely- (11) option grantee means an employee having right but not an obligation to exercise in pursuance of the ESOS. (2) For clause 5.1, the following shall be substituted, namely- 5.1 No ESOS shall be offered unless the disclosures, as specified in Schedule IV, are made by the company to the prospective option grantees and the company constitutes a Compensation Committee for administration and superintendence of the ESOS. (3) In clause 5.3, for sub-clause ( f ), the following shall be substituted, namely- ( f ) the procedure for making a fair and reasonable adjustment to the number of options and to the exercise price in case of corporate actions such as rights issues, bonus issues, merger, sale of division and others. In this regard following shall be taken into consideration by the compensation committee- ( i ) the number and the price of ESOS shall be adjusted in a manner such that total value of the ESOS remains the same after the corporate action ( ii ) for this purpose global best practices in this area including the procedures followed by the derivative markets in India and abroad shall be considered. ( iii ) the vesting period and the life of the options shall be left unaltered as far as possible to protect the rights of the option holders. (4) In clause 6.2, after sub-clause ( i ), the following shall be inserted, namely- ( j ) the method which the company shall use to value its options whether fair value or intrinsic value. ( k ) the following statement : In case the company calculates the employee compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed in the Directors report and also the impact of this difference on profits and on EPS of the company shall also be disclosed in the Directors report. (5) After clause 7.4 the following shall be inserted, namely- 7.5 A company may reprice the options which are not exercised if ESOSs were rendered unattractive due to fall in the price of the shares in the market : Provided that the company ensures that such repricing shall not be detrimental to the interest of employees and approval of shareholders in General Meeting has been obtained for such repricing. (6) In clause 8.1, the following proviso shall be inserted, namely- Provided that in case the company calculates the employee compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed in the Directors report and also the impact of this difference on profits and on Earning Per Share of the company shall also be disclosed in the Directors report. (7) In clause 12 after sub-clause ( k ), following shall be inserted namely- ( l ) Where the company has calculated the employee compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed. The impact of this difference on profits and on EPS of the company shall also be disclosed. ( m ) Weighted-average exercise prices and weighted-average fair values of options shall be disclosed separately for options whose exercise price either equals or exceeds or is less than the market price of the stock on the grant date. ( n ) A description of the method and significant assumptions used during the year to estimate the fair values of options, including the following weighted-average information : (1) risk-free interest rate, (2) expected life, (3) expected volatility, (4) expected dividends, and (5) the price of the underlying share in market at the time of option grant. (8) After clause 13.1, the following shall be inserted, namely- 13.2 Where a scheme provides for graded vesting, the vesting period shall be determined separately for each portion of the option and shall be accounted for accordingly. (9) In clause 17.2 after sub-clause ( b ), the following shall be inserted namely- ( c ) Total number of shares to be granted. (10) After clause 17.4, the following shall be inserted, namely- 17.5 Approval of shareholders by way of separate resolution in the general meeting shall be obtained by the company in case of; ( a ) allotment of shares to employees of subsidiary or holding company and, ( b ) allotment of shares 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 allotment of shares. (11) Clause 21 shall be omitted. (12) For clause 22.1, the following shall be substituted, namely- 22.1 The shares arising pursuant to an ESOS and shares issued under an ESPS shall be listed immediately upon exercise in any recognized stock exchange where the securities of the company are listed subject to compliance of the following : a. The ESOS/ESPS is in accordance with these Guidelines. b. In case of an ESOS the company has also filed with the concerned stock exchanges, before the exercise of option, a statement as per Schedule V and has obtained in-principle approval from such Stock Exchanges. c. As and when ESOS/ESPS are exercised the company has notified the concerned Stock Exchanges as per the statement as per Sche-dule VI. (13) After clause 22.1, the following clause shall be inserted, namely- 22.2 The shares arising upon exercise of option issued by an unlisted company which are to be vested or be exercised after the company is listed, may be listed after the initial public offering by such company subject to fulfilment of the following requirements : ( i ) Ratification of the resolution passed for issuance of ESOS or ESPS Earlier resolution passed for issuance of ESOS/ESPS shall be ratified by the shareholders of listed company in the General Meeting. The notice for ratification of earlier resolution shall include all the relevant disclosures required in terms of these Guidelines. ( ii ) Disclosures in the offer document - Following disclosures shall be made in the offer document for IPO :- ( a ) A disclosure about the intention of the holders of shares allotted on exercise of option granted under ESOS or allotted under ESPS, to sell their shares within three (3) months after the date of listing of shares in such initial public offering (aggregate number of shares intended to be sold by option holders) to be disclosed. In case of ESOS the same shall be disclosed regardless of whether the shares arise out of options exercised before or after the initial public offering. ( b ) Specific disclosures about the intention of sale of ESOS or ESPS shares within three (3) months after the date of listing, by directors, Senior Managerial personnel and employees having ESOS or ESPS shares amounting to more than 1% of the issued capital (excluding outstanding warrants and conversions), which inter alia shall include name, designation and quantum of ESOS or ESPS shares and quantum they intended to sell within three (3) months. ( c ) A disclosure in line with the clauses 12 and 19 of these guidelines, regarding all the options/shares issued in last three (3) years (separately for each year) and on a cumulative basis for all the options/shares issued prior to date of the prospectus. 22.3 For listing of shares issued pursuant to ESOS or ESPS the company shall make application to the Central Listing Authority as per SEBI (Central Listing Authority) Regulations, 2003 and obtain the in-principle approval from Stock Exchanges where it proposes to list the said shares. 22.4 The existing provisions of lock-in specified in SEBI (Disclosure and Investor Protection) Guidelines, 2000 shall not be applicable on the pre-initial public offering ESOS options/shares, ESPS options/shares held by employees other than promoters provided that the earlier resolution is ratified by the shareholders in General Meeting and disclosures in the prospectus for IPO is made as mentioned in clause 22.2 ( i ) ( ii ). 22.5 The ESOS/ESPS shares held by the promoters prior to Initial Public offering shall be subject to lock-in as per the provisions of SEBI (Disclosure and Investor Protection) Guidelines, 2000. 22.6 The listed companies shall file the ESOS or ESPS Schemes through EDIFAR filing. 22.7 When holding company issues ESOS/ESPS to the employee of its subsidiary, the cost incurred by the holding company for issuing such options/shares shall be disclosed in the notes to accounts of the financial statements of the subsidiary company. 22.8 The Company shall appoint a registered Merchant Banker for the implementation of ESOS and ESPS as per these guidelines. (14) After clause 22, the following shall be inserted, namely- 22A. ESOS/ESPS through Trust Route 22A.1 In case of ESOS/ESPS are administered through a Trust Route, the ESOS/ESPS Trust shall be consolidated with the company in accordance with the Accounting Standard (AS21) specified by the Institute of Chartered Accountants of India and these Guidelines shall be applicable to the consolidated entity. (15) For clause 23 following shall be substituted, namely- 23.1 These guidelines shall come into force with effect from 19th June, 1999 and will be applicable to the options/shares granted/allotted on or after 19th June, 1999 unless otherwise specified in the Guidelines. (16) In Schedule I, for clause ( b ) the following shall be substituted, namely- ( b ) The accounting value of options shall be equal to the aggregate, over all employee stock options granted during the accounting period, of the intrinsic value of the option or, if the company so chooses, the fair value of the option. (17) After Schedule II, the following Schedules shall be inserted, namely- Schedule III ( Clause 2.1 ) ( i ) The fair value of a stock option is the price that shall be calculated for that option in an arm s length transaction between a willing buyer and a willing seller. ( ii ) The fair value shall be estimated using an option-pricing model (for example, the Black-Scholes or a binomial model) that takes into account as of the grant date the exercise price and expected life of the option, the current price in the market of the underlying stock and its expected volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the option. ( iii ) The fair value of an option estimated at the grant date shall not be subsequently adjusted for changes in the price of the underlying stock or its volatility, the life of the option, dividends on the stock, or the risk-free interest rate. ( iv ) Where the exercise price is fixed in Indian Rupees, the risk-free interest rate used shall be the interest rate applicable for a maturity equal to the expected life of the options based on the zero-coupon yield curve for Government Securities. ( v ) The expected life of an award of stock options shall take into account the following factors : ( a ) The expected life must at least include the vesting period. ( b ) The average lengths of time similar grants have remained outstanding in the past. If the company does not have a sufficiently long history of stock option grants, the experience of an appropriately comparable peer group may be taken into consideration. ( c ) The expected life of ESOSs should not be less than half of the exercise period of the ESOSs issued until and unless the same is supported by historical evidences with respect to ESOSs issued by the company earlier. ( vi ) If the company does not have a sufficiently long history of traded stock prices to estimate the expected volatility of its stock, it may use an estimate based on the estimated volatility of stocks of an appropriately comparable peer group. ( vii ) The estimated dividends of the company over the estimated life of the option may be estimated taking into account the company s past dividend policy as well as the mean dividend yield of an appropriately comparable peer group. ( viii ) Justification shall be given for significant assumptions. If at the time of further issue of ESOS/ESPS there are any changes in the assumptions, reasons for the same shall be given. Schedule IV Disclosure Document ( Clause 5.1 ) Part A Statement of Risks All investments in shares or options on shares are subject to risk as the value of shares may go down or go up. In addition, employee stock options are subject to the following additional risks : 1. Concentration : The risk arising out of any fall in value of shares is aggravated if the employee s holding is concentrated in the shares of a single company. 2. Leverage : Any change in the value of the share can lead to a significantly larger change in the value of the option as an option amounts to a levered position in the share. 3. Illiquidity : The options cannot be transferred to anybody, and therefore the employees cannot mitigate their risks by selling the whole or part of their options before they are exercised. 4. Vesting : The options will lapse if the employment is terminated prior to vesting. Even after the options are vested, the unexercised options may be forfeited if the employee is terminated for gross misconduct. Part B Information about the company 1. Business of the company : A description of the business of the company on the lines of item V( a ) of Part I of Schedule II of the Companies Act. 2. Abridged financial information : Abridged financial information for the last five years for which audited financial information is available in a format similar to that required under item B(1) of Part II of Schedule II of the Companies Act. The last audited accounts of the company should also be provided unless this has already been provided to the employee in connection with a previous option grant or otherwise. 3. Risk Factors : Management perception of the risk factors of the company in accordance with item VIII of Part I of Schedule II of the Companies Act. 4. Continuing disclosure requirement : The option grantee should receive copies of all documents that are sent to the members of the company. This shall include the annual accounts of the company as well as notices of meetings and the accompanying explanatory statements. Part C Salient Features of the Employee Stock Option Scheme This Part shall contain the salient features of the employee stock option scheme of the company including the conditions regarding vesting, exercise, adjustment for corporate actions, and forfeiture of vested options. It shall not be necessary to include this Part if it has already been provided to the employee in connection with a previous option grant, and no changes have taken place in the scheme since then. If the option administrator (whether the company itself or an outside securities firm appointed for this purpose) provides advisory services to the option grantees in connection with the exercise of options or sale of resulting shares, such advice must be accompanied by an appropriate disclosure of concentration and other risks. The option administrator should conform to the code of conduct appropriate for such fiduciary relationships. Schedule V ( Clause 22.1 ) Information required in the Statement to be filed with Stock Exchange Description of Stock Option Scheme 1. Authorized Share Capital of the Company : 2. Issued Share Capital of the Company as on date of Institutional of the Scheme/amending of the Scheme. 3. Date of Institution of the Scheme/amending of the Scheme 4. Validity period of the Scheme 5. Date of notice of AGM/EGM for approving the Scheme/for amending the Scheme/for approving grants under clause 6.3( a ) or ( b ) of the SEBI (ESOS ESPS) Guidelines. 6. Date of AGM/EGM approving the Scheme/amending the Scheme/approving grants under clause 6.3( a ) or ( b ) of the SEBI (ESOS ESPS) Guidelines. 7. Kind of security granted as Options under the Scheme 8. Identity of classes of persons eligible under the scheme Permanent employees Permanent employees outside India Permanent employees of subsidiary Permanent employees of holding company Whole-time directors Independent directors 9. Total number of securities reserved under the scheme : 10. Number of securities entitled under each option 11. Total number of options to be granted : 12. Maximum number of Options to be granted per employee in each grant and in aggregate : 13. Exercise price or pricing formula : 14. Whether any amount payable at the time of grant of the Options ? If so, quantum of such amount. 15. Lock-in period under the Scheme u Lock-in period between grant and vesting u Lock-in period after exercise 16. Vesting Period under the Scheme 17. Maximum period within which the options shall be vested. 18. Exercise Period under the plan : 19. Whether employee can exercise all the Options Vested at one time ? Yes/No 20. Whether employee can exercise vested Options at various points of time within the exercise period ? Yes/No 21. Whether scheme provides for the procedure for making a fair and reasonable adjustment to the number of options and to the exercise price in case of rights issues, bonus issues and other corporate actions ? Clause in Scheme describing such adjustment : 22. Description of the appraisal process for determining the eligibility of employees under the scheme. 23. The specified time period within which vested options are to be exercised in the event of termination or resignation of an employee : 24. The specified time period within which options are to be exercised in the event of death of the employee : 25. Whether Plan provides for conditions under which option vested in employees may lapse in case of termination of employment for misconduct ? Clause in Scheme describing such adjustment: 26. Whether Plan provides for conditions for the grant, vesting and exercise of option in case of employees who are on long leave ? Clause in Scheme describing such adjustment : 27. Whether amount paid/payable by the employee at the time of the grant of the Option will be forfeited if the employee does not exercise the option within the exercise period ? Clause in Scheme describing such adjustment : 28. Details of approval of shareholders pursuant to clause 6.3 of the SEBI (ESOS ESPS) Guidelines with respect to : u Grant of options to employees of subsidiary or holding company. u Grant of options 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 the option : 29. Details of the variation made to the scheme along with the rationale therefore and the details of the employees who are beneficiary of such variation : Company Secretary Place : Date : Documents to be filed with registration statement u Copy of Stock Option Scheme/Amended Stock Option Scheme, certified by company secretary. u Copy of Notice of AGM/EGM for approving the Scheme/for amending the Scheme/for approving grants under clause 6.3( a ) or ( b ) of the SEBI (ESOS ESPS) Guidelines, certified by the company secretary. u Copy of resolution of shareholders for approving the Scheme/for amending the Scheme/for approving grants under clause 6.3( a ) or ( b ) of the SEBI (ESOS ESPS) Guidelines, certified by the company secretary. u List of Promoters as defined under the SEBI (ESOS ESPS) Guidelines. u Copy of latest Annual Report. u Certificate of Auditor on compliance with SEBI (ESOS and ESPS) Guidelines. u Specimen copy of Share certificate. u Any other relevant documents. Undertakings A. The undersigned company hereby undertakes : (1) To file, a post-effective amendment to this statement to include any material information with respect to the scheme of distribution not previously disclosed in the statement or any material change to such information in the statement. (2) To notify, the concerned stock exchanges on which the securities of the company are listed, of each issue of securities pursuant to the exercise of options under the scheme mentioned in this Statement, in the prescribed form, as amended from time to time. (3) That the company shall conform to the accounting policies specified in clause 13.1 of the SEBI (ESOS ESPS) Guidelines. (4) That the Scheme confirms to the SEBI (ESOS ESPS) Guidelines. (5) That the company has in place systems/codes/procedures to comply with the SEBI (Insider Trading) Regulations. Signatures Pursuant to the requirements of the SEBI Act/guidelines, the company certifies that it has reasonable grounds to believe that it meets all the requirements for the filing of this form and has duly caused this statement to be signed on its behalf by the undersigned, thereunto, duly authorized. Name of the company Sd/- Name of the Compliance Officer Designation Date : Place : Schedule VI ( Clause 22.1 ) Format of Notification for Issue of Shares Under the Stock Option Plans 1. Company Name and Address of Registered Office : 2. Name of the Exchanges on which the company s shares are listed : 3. Filing date of the Statement referred in clause 22.1.b of guidelines with Stock Exchange : 4. Filing Number, if any : 5. Title of the Stock Option Scheme pursuant to which shares are issued, if any : 6. Kind of Security to be listed : 7. Par value of the shares : 8. Date of issue of shares : 9. Number of shares issued : 10. Share Certificate no, if applicable : 11. Distinctive number of the share, if applicable : 12. ISIN Number of the shares if issued in Demat : 13. Exercise Price per share : 14. Premium per share : 15. Total Issued Shares after this issue : 16. Total Issued Share capital after this issue : 17. Details of any lock-in on the shares : 18. Date of expiry of lock-in : 19. Whether shares identical in all respects to existing shares if not, when will they become identical ? : 20. Details of Listing fees, if payable : Signature of Company Secretary/ Compliance Officer Date : Place :