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.
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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