EMPLOYEE STOCK OPTION PLAN (ESOP) Therefore, ESOP is primarily a kind of incentive to hold the employees to the company s fold.

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1 EMPLOYEE STOCK OPTION PLAN (ESOP) JSP ASSOCIATES Employee Stock Option Plan has been envisaged in the backdrop of realizing the value of knowledge lying in the minds of existing employees by the employer companies and therefore in order to attract, reward, motivate and retain its employees for high levels of individual performance and for unusual efforts to improve the financial performance of the company, which will ultimately contribute to the success of the Company, a Company grants an option to its employees to acquire shares of their employer company over a period of time at a reduced price or nil price. Therefore, ESOP is primarily a kind of incentive to hold the employees to the company s fold. MEANING OF ESOP ESOP is an employee stock option that gives a right (not an obligation) to buy shares of a company at a price fixed on the date of grant. WHY ESOP? To attract, reward, motivate and retain employees for high levels of individual performance and for unusual efforts. Promote employee ownership culture and reduce the attraction. To improve the financial performance of the Company, which will ultimately contribute to the success of the Company. Enhances job satisfaction of the Employee due to ownership incentive. Companies grant an option to employees to acquire shares of their employer company over a period of time at a reduced price or nil price. ESOP proves to be a good retirement benefit plan for employee. Therefore, ESOP is primarily a kind of incentive to hold the employees to the Company s fold. MERITS OF ESOPs ESOPs provide advantages like aligning the interest of the mangers with those of the owners. It is a non-cash compensation tool to compete for the best human resources.

2 The main advantage is the accounting advantage that gives an opportunity to the corporate to pay, without a reduction in book profits. The company gains employee s goodwill, loyalty and commitment. Employees are motivated and encouraged to think like owners Attracting fresh talent on a regular basis Employee turnover rate is generally reduced Can be used to finance growth through its tax-privileged status in a cost-effective manner. DEMERITS OF ESOP An ESOP can create serious cash flow issues for a company. If a company borrows money to fund an ESOP, it will have to allocate significant earnings towards repayment. Employee Stock Option Plan includes: Employees of holding company ESOP COVERAGE Own company employees (including directors / officers / other employees) Indian / NRIs Employees of subsidiary company HOW DO ESOPs HELP AN INDIVIDUAL EMPLOYEE Employees that prefer to choose and ESOP are far more likely to have a greater sense of ownership than employees who stay away from ESOPs. Another advantage is tax benefit their accounts grow tax-free. SCOPE OF EMPLOYEE STOCK OPTION PLAN An employee who is a promoter or a part of the promoter group shall not be eligible to participate in the Employee Stock Option Plan of the company. A director who either by himself or through his family or through any investment company, directly or indirectly holds more than 10% of the outstanding equity shares of the Company shall not be eligible to participate in the Employee Stock Option Plan.

3 SHAREHOLDERS APPROVAL JSP ASSOCIATES The ESOP will be approved by the shareholders by a special resolution. The resolution shall contain terms and conditions of the Plan which inter-alia shall include the following: Identification of classes of beneficiaries entitled to participate in the ESOP. Vesting of the Stock Option. Period of exercise and process of exercise. Exercise price or pricing formula. The appraisal process for determining the eligibility of employees to the Stock Option Plan. Upper limit on the quantum of stock options to be issued in the aggregate. The special resolution shall also state that the company shall conform to the accounting policies. Specific shareholder approval shall be obtained in the case of grant of stock options to employees of subsidiary / holding company. Grant of stock options to specific employees, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant shall be subject to approval by the shareholders by way of separate resolution. In extra ordinary situations, the company in general meeting may by special resolution vary the terms of options granted but not yet exercised in a manner not prejudicial to the interests of the option holders. The notice for such resolution shall provide full details of the beneficiaries of such variation of terms and the rationale therefor. PRICING The companies will have the freedom to fix the exercise price at any level provided they conform to the accounting policies. STOCK OPTIONS OUTSANDING AT PUBLIC ISSUE The provisions of the SEBI guidelines prohibiting initial public offering by companies having outstanding options shall not apply to employee stock options.

4 If any employee stock options are outstanding at the time of an initial public issue by an unlisted company, the promoters contribution shall be calculated with reference to the enlarged capital that would arise if all vested options are exercised. If any employee stock options are outstanding at the time of a public issue, the offer document shall disclose all the information. LOCK-IN PERIOD, VESTING AND EXERCISE OPTIONS There should be a minimum period of one year between the grant of options and vesting. There should be a maximum period of eight years between the grant of options and vesting. Employee options must be exercised within a maximum period of five years from the date of vesting. Shares issued in exercise options shall not be subject to any lock-in-period. NON-TRANSFERABILITY OF STOCK OPTIONS Options shall not be transferable, and only the employee shall be entitled to exercise the options. They cannot be pledged, hypothecated, mortgaged or otherwise alienated in any other respect. However, the company may allow cashless system of exercise under which empanelled stock brokers (or, subject to company law requirements, the company itself) may fund the exercise price of the options against the sale proceeds of part or whole of the shares arising out of the exercise. In the event of the death of the employee, while in employment, all the options granted to him as on the date of death shall pass along his estate and shall be fully vested in his estate as on that date and may be claimed by his legal heirs. In the event that the employee suffers a permanent incapacity while in employment, all the options granted to him as on the date of permanent incapacitation, shall fully vest in him on such date. COMPENSATION COMMITTEE OF THE BOARD The Scheme would be administered under the superintendence and direction of a Compensation Committee of the Board of Directors. The Compensation Committee shall consist of a majority of independent directors.

5 The quantum of issue of options under an Employee Stock Option Plan to employees both in the aggregate and to any single employee shall be determined by the Compensation Committee subject to the limits laid down by the company in general meeting. The Compensation Committee shall formulate the detailed terms and conditions of the option scheme including: The conditions under which options vested in employees may lapse in case of termination of employment for misconduct. The procedure for making a fair and reasonable adjustment to the number of options and to the exercise price in case of rights issues, bonus issues and other corporate actions The grant, vesting and exercise of options in case of employees who are on long leave or sabbatical The procedure for cashless exercise of options. The Compensation Committee may provide that in the event of an employee resigning from the services of the company or his employment being terminated for whatever reasons, the employee should exercise the vested options within a specified period after such resignation or termination. DISLCOSURE, ACCOUNTING POLICIES AND AUDIT Director s Report: Board of Directors shall disclose either in the Director s Report or in the annexure to the Director s Report, the following details of the Stock Option Plan: The total number of shares covered by the Employee Stock Option scheme as approved by the shareholders The Pricing formula Options granted Options vested Options exercised Options forfeited Extinguishment or modification of options

6 Money realized by exercise of options Total number of options in force Employee wise details of options granted to o Senior managerial personnel o Any other employee who receives a grant in any one year of options amounting to 5% or more of options granted during that year. Diluted earning per share (EPS) calculated in accordance with International Accounting Standards (IAS) 33 Accounting Policies: In respect of options granted during any accounting period, the accounting value of the options shall be treated as another form of employee compensation in the financial statements of the company. The accounting value of options shall be equal to the maximum of: the aggregate over all employee stock options granted during any accounting period of the excess of the fair value of the option over the specified percentage of the market value of the share on the date of grant of the option; or excess of the aggregate of the option discounts on all employee stock options granted during any accounting period over 20% of the total employee compensation as reported in the profit and loss account of that period. zero. The Companies Act, 1956 LEGAL PROVISIONS RELATING TO ESOP Foreign Exchange Management Act, 1999 SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme), Guidelines, 1999 Income Tax Act, 1961 SEBI Guidelines are applicable only in case of Listed Companies. However, generally unlisted companies also voluntarily comply with these guidelines.

7 Accounting guidelines (ICAI, IFRS, US GAAP) Under the present Regime, POLICIES TO FRAME ESOP SCHEMES Promotions / group company transfers / termination / retirement. Eligibility of new joinees and effective date of grant of option should be mentioned. The Company has freedom to specify the lock-in-period for the shares issued in pursuance to the exercise of the options. Liquidity options to the Employees after exercise of shares. PRICING CRITERIA ESOPs are freely priced ESOPs can be issued at discount or premium DFCF method is used in case of foreign employees