EMPLOYEE STOCK OPTIONS

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Index Nature of Employee Stock Options

(ESOP) Main concepts used in ESOP Main concepts explained with

example Granting of Options Vesting of Options Exercising of Options Points to be decided for preparing the

ESOPIOLCP

Nature of Employee Stock Options (ESOP)

Employee stock options are rights

granted by the company to its employees to apply its own shares of the company at a exercise price determined at the time of granting ( giving ) of options.

They are to be paid at the time of issue of shares.

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Main concepts used in ESOP…….countined

Eligible Employee: permanent employee of the

company excluding promoter or persons holding 10% or more of holding and independent director

Grant/Granting of options: means when an employee given an option(s)

Vesting / Vesting of options: means when an employee is given right to apply for shares in the company .

Vesting period: means the period after which an employee is entitled to apply for shares in the company .

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Main concepts used in ESOP

Exercise price: means the price at

which the employee have right to apply for the shares in the company .

Exercise period : means the period during which an employee is entitled to apply for shares in the company.

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Main concepts used-Explained with Example….continued

For example a company grants 1000 options to an employee

on 1 October 2014 with the condition that he is entitled to apply for one share , for each option after expiry of one

year , at a price of Rs 20 per share with in period of five years from the date of vesting . ( means his entitlement )

Thus it means , that 1000 options will be vested in him after

the expiry of one year of granting of options that is on 1 October 2015.

It means he will be entitled to apply for 1000 shares ( one share for each option ) at a price of Rs 20 per share at any time during

the period of 1 October 2015 to 1 October 2019 ( exercise period of five years ) in respective of its price in the

market by paying the amount at the time of allotment .

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Main concepts used-Explained with example

1 October 2015 will be know as Vesting Date, and period from 1 October 2014 to 1 October 2015 will be known as Vesting Period .

The price of shares of Rs 20 per share will be known as Exercise Price .

The period from 1 October 2015 to 30 September 2019 will be known as Exercise Period.

The employee may apply for 500 shares on 1 October 2015 by paying Rs 10,000 at the rate of Rs 20 per share on 1 October 2015 and may apply for remaining 500 shares on 30 September 2019 (within the exercise period of five years by paying Rs 10,000 at rate of Rs 20 per share on 30 September 2019 irrespective of market price at that time that .

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Granting of Options……continued

The company may grant the a number of options to its eligible employees depending upon certain criteria like designation , period of service and performance etc .

Each option will entitle the employee to apply for one share in the company at the exercise price ( price per share) .

Exercise price is determined by the company at the time of granting of options to the employees.

The company has liberty to determine the exercise price.

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Granting of Options

The exercise may be fixed at par or at market price or at certain discount to the market price at the time of granting of options .

The company has liberty to determine the number of options to be granted to the eligible employees.

The company have to determine the maximum number of options an employee may be granted .

In case a company wish to provide more than 1% of its equity capital to an employee , then it has to take special approval from its shareholders , thus a company generally restricts its option less than 1% of its holding.

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Vesting of Options ……continued

Options granted to an employee will be

vested in him after expiry of vesting period which will be fixed at the time of granting of options .

There is a vesting period during which options cannot be exercised

Vesting period is minimum one year from the date of granting the options.

The company has liberty to determine the vesting period after which options may be exercised .

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Vesting of Options

Generally companies fix the vesting

period from one to four years from the granting date of options.

When employees leave during the vesting period options are forfeited

When employees leave after the vesting period options are exercised immediately before relieving. .

Employees are not permitted to sell/transfer options

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Exercising of Options ……continued

Options can be exercised after the vesting date that is after the expiry of vesting period .

Vesting date is the date from which the employees are entitled to exercise their options that is their right to apply for the shares at the exercise price .

Options may be exercised in one or more tranches (installments) during the exercising period .

The company may fix the minimum number of options which may be exercised in one tranche .

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Exercising of Options Exercised period is the period during which an

employee may exercise his options to subscribe the shares after the vesting date.

The company has liberty to determine the period during which options may be exercised .

Generally companies fix the exercise period from three to ten years from the vesting date.

An employee is required to make the payment of price of shares at the time of allotment.

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Points to be decided for preparing the ESOP

Maximum number of options to be

granted to an employee. To determine the exercise price . To determine the vesting period . To determine the exercising period.

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