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For companies, which were unlisted when stock options were granted under the employee stock option scheme and are listed at the time of exercise, the shares issued on exercise of such options may be listed if the shareholders ratify the earlier resolution after the company is listed.
For the companies going public now, the offer document will have to include a clause on the intentions of the holders of ESOS shares to sell their shares within 3 months of listing. These are some of the amendments suggested by the Securities and Exchange Board of India committee on Esops headed by J R Varma.
According to the committee, companies may be allowed to re-price their underwater options so long as the terms are not detrimental to the interest of the employees and they are approved by the shareholders. This will be applicable to any repricing done on or after June 30, 2003.
The committee has also suggested that in case the company follows the intrinsic value method, impact of fair value on profits and earnings per share is to be disclosed.
Pre-IPO (initial public offering) shares issued under the employee stock option scheme shall not have a lock-in period of one year as specified in Sebi (Disclosure and Investor Protection) guidelines 2000 unless these are issued to promoters provided that adequate disclosures in the offer document are made and the shareholders pass the ratification resolution after the company has gone public.
This exemption has been available to ESOS shares in DIP guidelines. The same has been reproduced here. This would be effective from the date when amendment to DIP guidelines were carried out viz, vide circular dated August 14, 2003.
The committee has also said that separate resolution needs to be passed if employee stock purchase scheme is to be implemented for employees of subsidiary or holding companies or more than one per cent each is proposed to be granted to identified employees. Shares arising out of ESOS will now be listed immediately upon exercise, provided the ESOS is in accordance with Sebi guidelines.
The committee has also dealt on the role of merchant bankers. It has noted that merchant bankers are in a better position to understand the Sebi guidelines and their certification about compliance of guidelines would result in effective compliance of the regulatory provisions.
The committee recommended that the role of the merchant banker is primarily to certify that the Esop scheme is compliant with the Sebi guidelines.
On the other hand, the auditor's certification will be primarily as to whether the Esop scheme has been implemented as per the scheme approved by the shareholders.
The auditor would also certify the accounting treatment thereof. The committee has clarified that the appointment of merchant bankers would only be in respect of new Esop approved on or after June 30, 2003, and not for existing schemes.
The committee clarified that both vested as well as unvested options, which are not exercised, are allowed to be repriced, subject to shareholders' approval.
The committee has also said that the market price should be redefined as the latest available closing price prior to the date of the meeting of the board of directors.
The committee has recommended that after the company is listed, no option grants can be made under any pre-IPO Esop unless the scheme is in conformity with Sebi guidelines, and it is ratified by the shareholders of the company after the IPO.
If no new grants are proposed to be made under the pre-IPO Esop, ratification by the shareholders of the company after the IPO would not be necessary. Even if the shareholders advise any change or reject the scheme, it would not affect the options granted prior to the IPO that is when the company was unlisted.
However, any change in terms of such pre-IPO options including repricing, change of vesting period or maturity would require approval by the shareholders.
If any option granted to employees in pursuance of ESOS are outstanding at the time of initial public offering, the offer document of the company shall disclose all information including the impact on the profits and on the earning per share of the last three years.