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Impact of the new Companies Act and Rules on ESOPs implemented


As you are aware that till date around 282 Sections of the Companies Act, 2013 ("Act") have come into force and allied Rules including the Rules governing the ESOPs i.e. Companies (Share Capital and Debentures) Rules, 2014 ("Rules") have been notified by the Ministry of Corporate Affairs (MCA).

This has implications for both listed and unlisted companies as detailed below :

If your company is Listed, It would be contextual to mention that the draft of the aforesaid Rules were published by MCA seeking public comments by October 2013 while SEBI was considering bringing a new set of regulations governing ESOPs including the regulations for Trust route of ESOP administration. We had communicated our observations on the draft Rules vis-à-vis SEBI's intentions to you and accordingly submitted our feedback to MCA highlighting the possible clashes between the SEBI’s intentions and the said Rules particularly emphasizing the difficulty in administering the ESOP Scheme through the Trust route more particularly in respect of the source and ceiling of shares to be acquired by the Trust, Trust constitution and disclosures relating to the Trust operations. Almost the draft Rules have come as Rules.

Now, in view of coming into force of the sections and impending effect of the Rules, it is desirable to have an overview of the new provisions, their impact and consequent course of action, if any in respect of the existing ESOP Scheme (s) and the ESOP Trust of the Company.

The new provisions require that Independent Directors shall not be granted any ESOPs and that the Trust, if any created for ESOP administration that is funded by the Company shall be constituted with persons other than a Promoter, Director, Key Managerial Persons and persons having 10% or more controlling interest in the Company, the Trust cannot acquire more than 5% of the paid-up equity and free reserves and the Trust funding should be approved by members.

While the existing position of the Company in respect of grant of ESOPs to Independent Directors and Trust set-up, funding and other Trust activities might be in due compliance of the erstwhile Act; it may not be consistent with the new provisions. As per new Act, inconsistency of any action or deed may lead to its invalidity. Therefore, there is a need to have a relook on what to do to make the actions, rights and liabilities created under the erstwhile Act to have the same effect and force under the new Act.

If your company is Unlisted, it would be contextual to mention that the draft of the aforesaid Rules were published seeking public comments by October 2013. We had communicated our observations on the draft Rules to you and also submitted our feedback to MCA urging for simplification of the Rules. Almost the draft Rules have come as Rules.

The new provisions seek to regulate the issue of ESOPs which used to be relatively unregulated till now. The new provisions restricts grant of ESOPs to the Promoters, Independent Directors and Directors having more than 10% of controlling interest. There is a mandate to get the ESOP Scheme approved by the members by way of a special resolution, minimum vesting period prescribed is 1 year, unvested ESOPs are required to vest on death or permanent incapacity of an employee, etc. These are applicable to all the unlisted Companies whether Private or Public.

Further, in case of unlisted Public Companies which have a Trust for administration of ESOPs, the new requirements are even more stringent requiring that the Trust shall be constituted with persons other than a Promoter, Director, Key Managerial Persons and persons having 10% or more controlling interest in the Company, the Trust cannot acquire more than 5% of the paid-up equity and free reserves and the Trust funding should be approved by members.

Now, in view of coming into force of the sections and impending effect of the Rules, it is desirable to have an overview of the new provisions, their impact and consequent course of action, if any in respect of the existing ESOP Scheme(s) and the ESOP Trust of the Company.

These new requirements of law as mentioned above may not be found in the existing ESOP Scheme(s) nor in the Trust of the Companies. While the existing position of the Company in respect of terms of ESOPs or ESOP Scheme and Trust set-up, funding and other Trust activities might be in due compliance of the erstwhile Act; it may not be consistent with the provisions of the new provisions. As per new Act, inconsistency of any action or deed may lead to its invalidity. Therefore, there is a need to have a relook on what to do to make the actions, rights and liabilities created under the erstwhile Act to have the same effect and force under the new Act.

In our understanding, a transition is required within a reasonable time to validate those actions, rights and liabilities in light of new provisions.

You may like to refer to a brief write-up on the subject attached for your reference based on status of your company :

Listed Companies Unlisted Companies

We will be happy to explain in case you need any further clarification.

Please feel free to write to us with your queries / clarifications to consulting@esopdirect.com

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