Tuesday, July 27, 2021

Company Accounts - Employees' Stock Option Plan (ESOP)

 

Company Accounts

Employees’ Stock Option Plan (ESOP)


Part A: Discussion of basic theories including various relevant rules and provisions of the Companies Act, 2013 along with different necessary journal entries.

Part B: Seven Illustrations with Solutions



Part A


Definition of “Employees’ Stock Option”

Under section 2(37) of the Companies Act, 2013, "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 predetermined price.

 

Under section 62(1) (b) of the Companies Act, 2013 and Rule 12 of Companies (Share Capital and Debentures) Rules, 2014, Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares can be offered to employees under a scheme of employees' stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed.

 

Definition of “Employees’ Stock Option Plan (ESOP)”

“Employees’ Stock Option Plan (ESOP)” means a plan under which a company grants its employees stock options.

 

Meaning of “Employee”

Under section 62(1) (b) of the Companies Act, 2013 and Rule 12 of Companies (Share Capital and Debentures) Rules, 2014, “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 an independent director; or

(c)  An employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a       holding company of the company or of an associate company.

 

But an “employee” does not include −

(a)  An employee who is a promoter or a person belonging to the promoter group; or

(b)  A director who either himself or through his relative or through any body-corporate, directly or indirectly, holds more than ten percent of the outstanding         equity shares of the company.

 

Benefits of ESOP

1. It motivates employee to focus on value creation as there is direct benefit from the increase in share price;

2. It is a means to wealth creation for the employees;

3. It gives a sense of ownership to the employees;

4. It is beneficial to small companies which are cash strapped and unable to compensate talented     employees at par with market rates.

 

Some important definitions

Exercise

‘Exercise’ means making of an application by the employee to the company for issue of shares against option vested in him in pursuance of the ESOP.

 

Exercise period

‘Exercise period’ means the time period after vesting within which the employee should exercise his right to apply for shares against the option vested in him in pursuance of the ESOP.

 

Vesting

‘Vesting’ means the process by which the employee is given the right to apply for shares of the company against the option granted to him in pursuance of ESOP.

 

Vesting period

‘Vesting period’ means the period during which the vesting of the option granted to the employee in pursuance of ESOP takes place.




Part B 


Illustration: 1

Advent Limited has its share capital divided into equity shares of Rs 10 each. On 1st April, 2020 it granted 10,000 employees’ stock options at Rs 40, when the market price of each share was Rs 130. The options were to be exercised between 16th December, 2020 and 15th March, 2021. The employees exercised their options for 9,500 shares only and the remaining options were lapsed. The company closes its books on 31st March every year. Show the journal entries.

 


Illustration: 2

ABC Limited grants 1,000 employees’ stock options on 1st April, 2017 at Rs 40, when the market price is Rs 160. The vesting period is 2½ years and the maximum exercise period is one year. 300 unvested options lapse on 1st October, 2019. 600 options are exercised on 30th June, 2020. 100 vested options lapse at the end of the exercise period. Pass the necessary journal entries.

 


Illustration: 3

BJD Limited has its share capital divided into equity shares of Rs 10 each. On 1st October, 2020 it granted 20,000 employees’ stock options at Rs 50 per share, when the market price was Rs 120 per share. The options were to be exercised between 10th December, 2020 and 31st March, 2021. The employees exercised their options for 16,000 shares only and the remaining options lapsed. The company closes its books on 31st March every year. Show the journal entries as would appear in the books of the company up to 31st March, 2021.

 


Illustration: 4

Shiva Limited grants 1,000 stock options to its employees on 1st April, 2018 at Rs 60. The vesting period is 2½ years. The maximum exercise period is one year. Market price on the date of grant of stock options is Rs 90. All the options were exercised on 31st July, 2021. Journalise the above transactions.

 


Illustration: 5

ADN Limited has its share capital divided into equity shares of Rs 10 each. On 1st April, 2020 it granted 5,000 employees’ stock options at Rs 50, when the market price was Rs 140. The options were to be exercised between 1st December, 2020 and 28th February, 2021. The employees exercised their options for 4,800 shares only and the remaining options lapsed. Pass the necessary journal entries for the year ended 31st March, 2021.

 


Illustration: 6

PWC Ltd. granted 1500 employees’ stock options on 1st April, 2017 at Rs 80 when the market price was Rs 160. The vesting period was 3 years. The maximum exercise period was 1 year. All the 1500 options were exercised by the employees on 30th October, 2020. Pass necessary journal entries recording the above transactions.

 


Illustration: 7

HCL Limited grants 1250 stock options to its employees on 1st April, 2017 at Rs 80 per share, when the market price is Rs 200 per share. The vesting period is 3 years. The maximum exercise period is one year. 450 unvested options lapse on 1st April, 2020. 800 options are exercised on 31st August, 2020. Pass necessary journal entries to record the above transactions.




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