What we will be covering?

ESOS & ESPS

SWEAT EQUITY

BUY BACK OF SHARES

NAME ROLL NOKaranina Fernandes 6044Atul Bade IN0603Tanuja Chandragiri IN0612Nidhi Chhabra IN0615Amrita Dalal IN0617Azeema Dayani IN0619Shweta Poojary IN0648Priya Prabhu IN0649Sridevi Vemparala IN0667

ESOS & ESPS

Who is an employee?

a) a permanent employee of the company working in India or out of India; or

b) a director of the company, whether a whole time director or not ;or

c) an employee as defined in sub-clause (a) or (b) of a subsidiary, in India or out of India, or of a holding company of the company.

What is employee compensation?It is the total cost incurred by the company

towards employee compensation including basic salary, dearness allowance, other allowances, bonus and commissions including the value of all perquisites provided but does not include:

a) the fair value of the option granted under an Employee Stock Option Scheme; &

b) the discount at which shares are issued under Employee Stock Purchase Scheme.

What is Employee Stock Option?

It is the option given to the whole – time directors, officers or employees of a company which gives such directors , officers or employees, the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price.

‘ESOS shares’ means shares arising out of exercise of options granted under ESOS

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 ESOS

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 ESOS

Exercise Price means the price payable by the employee for exercising the option granted to him in pursuance of ESOS

Option Grantee means an employee having right but not an obligation to exercise in pursuance of the ESOS

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 ESOS

Vesting Period means the period duringwhich the vesting of the option granted to the employee in pursuance of ESOS takes place.

Who is a Promoter?

a) The person or persons who are in over- all control of the company;

b) The person or persons who are instrumental in the formation of the company or programme pursuant to which the shares were offered to the public;

c) The person or persons named in the offer document as promoter(s).

Who is eligible to participate in ESOS?

a) An employee shall be eligible to participate in ESOS of the company

a) An employee who is a promoter or belongs to the promoter group shall not be eligible to participate in the ESOS.

b) A director who either by himself or through his relative or through any body corporate ,directly or indirectly holds more than 10% of the outstanding equity shares of the companyshall not be eligible to participate in the ESOS

Compensation Committee

No ESOS shall be offered unless disclosures are made about various risks such as

- Concentration- Illiquidityare made to the option grantees.

The company should also constitute a Compensation Committee.

Pricing

The company granting option to its employees pursuant to ESOS will have the freedom to determine the exercise price subject to the accounting policies specified in clause.

Price Maker

Lock – in period and rights of the option - holdera) There shall be a minimum period of one year

between the grant of options and vesting of options.

b) The company shall have the freedom to specify the lock- in period for the shares issued pursuant to exercise of option.

c) The employee shall not have right to receive any dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to him, till shares are issued on exercise of option.

Consequence of failure to exercise Option

The amount payable by the employee, if any, at the time of grant of option:

a) May be forfeited by the company if the option is not exercised by the employee within the exercise period; or

b) The amount may be refunded to the employee if the option are notvested due to non-fulfillment of condition relating to vesting of option as per the ESOS

Non – Transferability of Option

Option granted to an employee shall not be transferable to any person

a) No person other than the employee to whom the option is granted shall be entitled to exercise the option

b) The option granted to the employee shall not be pledged, hypothecated, mortgaged or otherwise alienated in any other manner.

Non Transferability option

c) In the event of the death of employee while in employment, all option granted to him till such date shall vest in the legal heirs or nominees of the deceased employee

d) If employee suffers a permanent incapability while in employment, all the option granted to him as on date of permanent incapacitation, shall vest in him on that day

e) In the event of resignation or termination of the employee,all options not vested as on that day shall expire.

ESOP’s By Suzlon

The company had introduced stock option plan – 2005 for its employees.

The total options authorized under the plan 921000 Pricing formula on the date of grant was 50% of

final issue price determined in the IPO of the company

30% of the options will vest in the employees at the end of the first year, 30% at the end of the second year and the balance of 40% at the end of third year from the grant date.

The employee stock options granted shall be capable of being exercised within a period of five years from the date of vesting i.e. June 16, 2006

In case of termination of employment, all non-vested options would stand cancelled

Options that have vested but have not been exercised can be exercised within the time prescribed as mentioned above, failing which they would be cancelled.

Employee Stock Purchase Scheme

Employee Stock Purchase Scheme (ESPS)

means a scheme under which the company offers shares to employees as part of a public issue or otherwise.

.

Shareholders Approval

Special resolution to be passed in General Body meeting

Notice shall specify: Price of shares No of shares offered Eligibility No of shares to be granted

Who is eligible? Employee

Who is not eligible? Employee who is a promoter

A director who either by himself or through his relatives or through any body corporate, directly

holds more than 10% of the shares

Pricing and Lock-in

Shares issued under ESPS shall be locked in for a minimum period of one year from the date of allotment

If ESPS is part of public issue and if shares issued at same price to employees there is no lock in required

Company has a freedom to determine price of shares to be issued under ESPS provided they Conform to the provision laid down by company law

TAXING TIMES

If holding period is more than 12 months & if the sale is subject to the securities transaction tax, the capital gains are LTCG, which are tax-exempt.

If the holding period is less than a year, it results in STCG on which a tax of 10% has to be paid

SWEATEQUITY

Definition

The expression “sweat equity shares” means equity shares issued by the company to employees or directors at a discount for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

– Companies Act 1956

• Value Addition - Anticipated economic benefits derived by the enterprise from an expert and/or professional for providing the know-how or making available rights in the nature of intellectual property rights, by such person to whom sweat equity is issued for which the consideration is not paid or included in :

(a) The normal remuneration payable under the contract of employment, in the case of an employee, and/or

(b) Monetary consideration payable under any other contract, in the case of non-employee.

• Know-how - Is not restricted to technical know-how but can extend to practical knowledge, skill and expertise.

When & Why is Sweat Equity issued?

NEWLY FORMED

COMPANYSELECTS THE BEST

STAFF

PROMOTERGROUP

VALUE ADDITION

STRATEGIC ROLE

INCENTIVE

To whom are Sweat Equity shares issued to?• Sweat equity shares are issued to:

PROMOTERS

DIRECTORS

EMPLOYEES

What’s the Deal?

• Valuation of IPR/know how/value-additions shall be carried out by merchant banker.

• It is done in consultation of experts and valuers as deemed fit according to the nature of industry and the nature of property/value addition.

• He shall then obtain a certificate from Charted Accountant that the valuation/IPR are in accordance with accounting standards.

Pricing of Sweat Equity Shares.

Listed Company1. The price of sweat equity shares shall not be less than the

higher of the following:a) the average of the weekly high and low of the closing

prices of the related equity shares during last six months preceding the relevant date; or

b) the average of the weekly high and low of the closing prices of the related equity shares during the two weeks preceding the *relevant date.

2. If the shares are listed on more than one stock exchange, but quoted only on one stock exchange on given date, then the price on the stock exchange shall be considered.

3. If the share price is quoted on more than one stock exchange, then the stock exchange where there is highest trading volume during that date shall be considered.

4. If the shares are not quoted on the given date, then the share price on the next trading day shall be considered.

Special Resolution

Voting Process

Resolution Validity is12 months

Disclosures

Issue Process

Pre Issue• Explanatory statement consists of:

– The date of the meeting– Reasons/justification for the issue– Information regarding shares

Class/classes of persons to own itConsideration for such sharesNumber of shares

– Valuation report– Details of person to whom it is issued [relationship]– Statement [accounting policies specified by Central Government.]– Diluted earning per share [As per ICAI]

• Approval of Shareholders [≥ 1% of issued capital(excl o/s warrants & conversion)]

ESOPs and Sweat Equity

Pre-BudgetEmployer – No tax implicationsEmployee - Tax implications only at time of sale of shares

Grant Vest Exercise Sale of shares

No tax No tax No tax Capital Gains

(MoF compliant plan) (Difference between SP* & exercise price)

*SP = Selling Price

Taxation

ESOPs and Sweat EquityPost-Budget: FBT ARRIVES

Grant Vest Exercise Sale of shares

No tax No tax FBT Capital Gains(Valuation point (MP on vesting (SP less MPfor FBT) less exercise price) price on vesting)

The burden of FBT may be legally passed on to the employee

*MP = Market Price

*SP = Selling Price

Lock-in period is 3 years

Auditor’s Certificate is a must in the General meeting

The company shall within seven days of the issue of sweat equity,

issue or send statement to the exchange, disclosing:

number of sweat equity shares;

price at which the sweat equity shares are issued;

total amount invested in sweat equity shares;

details of the persons to whom sweat equity shares are issued;

and

the consequent changes in the capital structure and the

shareholding pattern after and before the issues of sweat equity. The Rules restricts the issue of sweat equity shares in a year

to 15% of the total paid-up equity share capital Or

shares of a value up to Rs.5,00,00,000/- whichever is higher. If this limit is to be exceeded, the same is required to be done with

the prior approval of the Central Government.

S.No Folio.No/Cert. No

Date of Passing of Resolution

Date of issue S.E.S

1 2 3 4

Name of the Allottee

Status of Allottee

Ref to entry in R.O.M

No.of S.E.S

5 6 7 8

Face Value Price of issue Tot. Cons. paid

Lock in period till which date

9 10 11 12

Register of Sweat Equity Shares

ESOPs vs. Sweat EquityESOPS Sweat Equity

Def Def

Types of ESOPS:

•Direct allotment of shares

•Option to acquire the shares

•Stock Appreciation Rights

No options available for Sweat Equity holders

Issued when the company is well established

Issued at the outset of a newly formed company or when the company is starting a new line of business.

It is issued as a motivation tactic. It is issued to attract the best & most sought after people in the industry.

Can be issued only to directors & employees of the company

Can be issued to promoters, directors & employees

Why did sweat equity come into the limelight? July 2000 – Sweat equity received from

Macronet

Nov 2000 – Macronet renamed to Rel. Infocom & again to RCIL Ltd.

RCIL became the parent Co. of Infocomm Mukesh Ambani transferred his options

Chances of Disclosures

March 2002 balance sheet of Infocomm- No disclosure about the option as required by schedule VI of companies act

2002- Merger of Reliance Communication & Information Ltd. which was renamed to Reliance InfocommPapers filed in Gujarat high court for sanction

2003- Flag telecom was acquiredPapers filed with US SEC didn’t mention

anything about option.

Mukesh Ambani gave up his 12 % sweat equity in the copany after paying Rs.500mn

BUY BACK OF

SHARES

Buy Back

The buyback of shares is the repurchase of its own shares by a company.

Buy Back Permitted since October 1998 – Companies (Amendment) Act 1999 , Sections 77A , 77AA and 77B.

The provisions of the Companies Act

SEBI buy back regulations for listed companies

Buy back of securities by private/unlisted companies.

Some of the Reasons for Buy Back

Achieving the target Capital structure.

Protection against hostile takeovers.

Increase promoters stake.

Share is undervalued.

Increasing the share value.

Resources Of Buy Back

Free reserves

The securities premium account

The proceeds of any shares or other specified securities.

Conditions Of Buy Back

The articles should permit buyback.

A special resolution should be passed in general meeting of the company authorizing buyback.

The buyback should be equal to or less than 25% of the total paid up capital and free reserves of the company.

All the shares for buy back should be fully paid up.

Buy Back should be in Accordance with the SEBI Regulations

The ratio of debt owned by the company should not be more than twice the capital and its free reserves, in thatparticular financial year.

Before making purchases under buy back , a declaration of solvency in the prescribed form has to be filed with the ROC.

Affidavit has to be submitted.

Declaration should be signed by atleast two directors of the company.

Prohibition from further issue of securities within a period of two years.

The securities should be extinguished and physically destroyed within seven days of the last date of completion of buy back.

Maintaining a register of securities – the consideration paid , the date of extinguishing and physically destroying of securities etc.

Any default to comply with the requirements /rules is punishable.

Prohibition of Buy Back

Through any/own subsidiary company

Through any investment company or a group of investment companies.

If the company has defaulted in respect of repayment.

SEBI Buy-Back of Securities by Listed

Companies Regulation, 1998

A company can buy back its own securities by one of the following methods

From the existing shareholders on a proportionate basis through tender offer.

From Open Market

From odd Lot holder

To buy back securities, a company should be authorized by

Special Resolution under Section 77-A(2) of the companies Act

A resolution passed by its Board of Directors under Section 77-A(2)(b)(i).

Release of Public Notice

Release of the Public Announcement (Regulation 8 )

Filling of Offer Document.

Dispatch of letter of offer to security holders.

Contents of Explanatory Statement/Public Notice1. The date of the meeting at which the proposal

for buy-back was approved by the Board of Directors of the company.

2. The necessity of Buy-back.3. The maximum amount required under the

Buyback and the sources of funds from which the buy-back would be financed.

4. The basis of arriving at the buy-back price.5. The number of securities that the company

proposes to buy-back.

7. a) The aggregate security holding of the promoter and of the director of the promoter.

b) Aggregate number of equity purchased or sold by people.

8. A confirmation that there are no defaults in repayment of deposits, redemption of debentures or pref shares or repayment of term loans to any financial institution(s) or bank(s).

9.A report addressed to the board of Directors by the company's auditor.

Instances where Buyback should not be effected

A company shall not buy back its specified securities from any person through negotiated deals, whether on or of the stock exchange or through spot transactions or through any private arrangement. (Clause 4.2)

Any person or an insider shall not deal in securities of the company on the basis of unpublished information relating to buy-back of specified securities of the company. (Clause 4.3)

Methods of Buy Back

Purchasing form existing security holders on a proportionate basis (Tender Offer Method)

Purchasing from open market (Through Stock Market)

Purchasing from odd lot holders

To employees under Scheme of stock Option or Sweat Equity

Buy Back Through Tender Offer

Offer Procedure: Time Period for offer: not less than 15 days and not exceeding 30 days Letter of offer to security holders Verification of offer: within 15 days

Escrow Account If the consideration payable dos not exceed Rs.100crores-25% of the

consideration payable; If the consideration payable exceeds Rs.100 crores-25% up to Rs.100

corers and 10% thereafter.

Payment to security holders Company should make payment to security holders within seven days.

Document Required

Public announcement in English National Daily and Hindi National Daily

Draft letter of offer needs to be submitted to Board within seven days of the public announcement

Declaration of solvency along with letter draft letter

Extinguishment of Certificate

Company shall extinguish and physically destroy the security certificate within the seven days from the date of acceptance

The particulars of the security certificates extinguished and destroy shall be furnished to the stock exchange where the specified securities of the company are listed within seven days of such act.

Company should maintain a record of security certificate which have been cancelled and destroyed.

Buy-Back from the open market

Through Stock Exchange Book-building Process

Buy Back Through Stock Exchange

Special Resolution in the Board meeting

It should not be made from the promoters of the company

Appoint Merchant Banker and make public announcement

Public announcement should be made at least seven days before the buy back

A copy of announcement should be filled with Board within 2 days along with specified fees

Public announcement should also contain disclosures regarding details of brokers and stock exchange

It should be done with electronic trading facility

Information regarding securities purchased and published same in a national daily

Identity of company shall appear on the electronic screen

Contd…...

Extinguishment of Certificate

(1) Extinguishment of certificates shall be applicable mutatis mutandis.

(2) The company shall complete

the verification of acceptances within fifteen days of the pay-out.

Buy-Back Through Book Building

Special resolution in board meeting stating the maximum price for the buy-back

Company shall appoint a merchant banker and make a public announcement

And it should be made at least 7 days prior to buy back procedure

Specific amount shall deposit in escrow account

A copy of announcement should filed with board along with the fees

Contd… Book building process shall be made though an electronically

linked transparent facility

The number of bidding center should not be less than thirty

The offer for buy back shall remain open for not less than 15 days and not more than 30 days

Merchant banker and company will decide the price based on acceptances received

The final buy back price would be the highest price accepted shall be paid.

Extinguishment of Certificate

Extinguishment of certificates shall be applicable mutatis mutandis.

Accounting Entries

(i) In case investments are sold for buying back own shares:

Bank Account……. Dr. (with the amount realized)

To Investment Account (with the book-value)

(ii) In case the proceeds of fresh issue are used for buyback purpose, then on fresh issue:

Bank Account……. Dr. (with the issue proceeds) To Debentures/ Other Securities Account (with the nominal value) To Securities Premium Account (with the premium received on such

shares, if any)

Contd…(iii) For buying back of shares/specified securities: Shareholders’ / Security holders’ Account………….

Dr. To Bank Account (with the amount paid on

buyback)

(iv) For cancellation of shares/securities bought back: Share Capital/ Specified Security Account………… Dr. (with the nominal value of security bought back) Free Reserves/Securities Premium Account……… Dr. (with the excess amount i.e., premium paid over

nominal value) To Shareholders’/ Security holders’ Account (with the amount paid)

Contd….

(v) In case the shares/specified securities are bought back at a discount:-

Share Capital/ Specified Security Account………. Dr.

(with the nominal value) To Shareholders’/Security holders’ Account (with the amount paid) To Capital Reserve Account ( with the amount of discount on

buyback)

(vi) For transfer of nominal value of shares purchased out of free reserves/securities premium account to capital redemption reserve account:

Free Reserve Account…………………………………. Dr. Securities Premium Account……………………….. Dr. To Capital Redemption Reserve Account ( with the nominal value of securities

bought back)

Contd…

(vii) For expenses incurred on buyback of shares: Buyback Expenses Account………………….. Dr. To Bank Account ( with the amount of such incidental expenses incurred on

buyback)

(viii)For writing-off buyback expenses against profit and loss account:

Profit and Loss Account………………………… Dr. To Buyback Expenses Account (to the extent the expenses are written-off)

Procedure for Buy back

The company to complete the interim formalities general meeting and passing resolutions

Make a public announcement at least one English National Daily, one Hindi National daily and Regional language Daily at the place where the registered office of the company is situated.

"specified date" for the purpose of determining the names of shareholders to whom the letter of offer has to be sent.

A public notice shall be given containing disclosures as specified in Schedule I of the SEBI regulations.

A draft letter of offer shall be filed with SEBI through a merchant Banker.

A copy of the Board resolution authorising the buy back shall be filed with the SEBI and stock exchanges.

SEBI issues a press release and the offer document is put on the SEBI website under primary market page under the head "buyback".

The company also appoints a registrar to act as an intermediary between the company and shareholder and carry out the buyback process.

The date of opening of the offer shall not be earlier than seven days or later than 30 days after the specified date

The buy back offer shall remain open for a period of not less than 15 days and not more than 30 days.

A company opting for buy back through the public offer or tender offer shall open an escrow Account.

Manner in which the Company to decide acceptance of the offer from each shareholder

In case the shares of the company are tradeable compulsorily in demat segment, the acceptances from any investor shall be on a proportionate basis

If the shares are not in compulsory demat segment,

1) the entire shares tendered being less than the minimum market lot shall be accepted in full.

2) the acceptances will be on proportionate basis in a manner to ensure that the acceptances are in market lot.

SEBI Investigation

Appoints an officer for Investigation -the concerned person should produce

various documents demanded by such officer

- On completion of the investigation the officer should submit report to SEBI

- Based on this report SEBI would initiate action

Buy-back by Private/Unlisted Companies

Special Resolution

Filing of letter of offer

Offer Procedure Payment

Procedure

Payment to Shareholders

Filing return to ROCs

Extinguishment of Certificate

Register of Shares

Example

Name of Company: SRF Ltd. Merchant Banker: JP Morgan Stanley Method Of Buyback: Open Market through

Stock Exchange No. Of Shares sought to buyback:1,400,000 Price Offered Per Share: 250 Opening Of Offer: 3 July 2006

Closure of Offer : 22nd June 2007 Total shares bought back: 16084 Consideration per share: Rs.197.20 Total Consideration paid: Rs. 3,124,934.12 No. of Shares Before Buy-back:64,526,089 No. of Shares after Buy-back:64,510,005

Difference between Capital Reductionand Buy-back Objectives Effect on capital Effect on no. of shares Why Buyback will not be preferred option

for capital reduction?

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