The Securities and Exchange Commission of Pakistan (SECP) has issued guidelines to facilitate public limited companies in structuring and offer of Employees Stock Option Schemes. According to the draft guidelines issued by the SECP here on Thursday, it shall apply to all Stock Option Schemes offered by the public limited companies to their employees including such Schemes already offered and options are still available for grant.
It said that a scheme may be subject to certain restrictions like restriction on sale of the options to the entitled employees or restriction on sale of the underlying shares for certain period of time after the exercise of the options. The restrictions must be elaborated in plain and simple language in the Scheme.
The maximum number of shares that can be issued pursuant to the Scheme must be determined and disclosed in the Scheme. This number may be fixed or in the form of percentage of the total paid up capital of the Company. Preferably, the entitlement pool must not be more than ten percent of the paid up capital of the Company. The purpose of these guidelines is to facilitate and encourage offer of the Employees Stock Option Schemes by the companies. These Guidelines provide the procedure for structuring and approval of an Employees Stock Option Scheme and set out the minimum information required to be disclosed therein.
The SECP has issued these guidelines under Section 506B of the Companies Ordinance. These Guidelines are general in nature and should not be construed as the sole criteria for approval and structuring of a Scheme and disclosures therein. The Company that offers a Scheme shall have the obligation and responsibility under the Rules in relation to approval, structuring, disclosures and administration of a Scheme.
The Company must comply with all relevant laws including the Ordinance, the Rules, the tax laws and the accounting standards when structuring and administering the Scheme. The Schemes must be structured with the intention to align interests of the employees and the shareholders. The Schemes must not be used as a tool for improper enrichment of executives.
According to the SECP, the Board of Directors (the "Board") of the Company shall appoint a Compensation Committee (the "Committee") for the administration and superintendence of the Scheme. The Committee shall consist of at least three non- executive directors. Majority of the members of the Committee must be independent directors, if the Company has sufficient number of directors on its board as independent director. The chairman of the Committee should be an independent director.
In case of Schemes by listed companies, the companies shall formulate claw-back policy for recovery of the options granted in case the targets set out are not achieved or the financial reports are restated with in a period of three years from the date of grant. The claw-back policy must be comprehensive and should consist of detailed recovery mechanism.
The Committee shall ensure that the contents of the Scheme are in line with the provisions of the Rules and overall financial conditions of the Company. Since basic purpose of the Scheme is to motivate employees to contribute to the development of the Company, the Committee must ensure that the Scheme is not only in the interest of the Company but also of its employees.
Scheme may be incentive based or performance based. However, all pre- requisites, if any, like targets and goals set for the option holders as entitlement for the exercise of options, be clearly specified and disclosed in the Scheme. The category of employees who are eligible for grant of options under the Scheme (eg Category A, B, C, D and E employees).
The Committee must ensure that the Scheme is offered only to the regular employees of the Company or the regular employees of its associated company or holding company. The Committee must specify the maximum number of options that can be granted to an employee. It would be preferred that an employee should not be granted more than 15% of the options allocated to the respective category of employees.
The Committee shall ensure that the options to be granted to employees are in line with the overall compensation policy of the company and no undue favour/ injustice is done to/ with any employee. For this purpose, the Committee shall mention in the Scheme the detailed criteria for grant of options.
The Committee shall mention the mechanism used for determining the Exercise Price and the rationale for the mechanism in the Scheme. It would be preferred if the Exercise Price is determined on the basis of average/ weighted average price of minimum six months period as the average price takes care of any volatility/ manipulation in the share price, guidelines added.
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