The Securities and Exchange Commission (SECP) has issued a detailed procedure for the public companies to introduce Employee Stock Option Scheme for their employees. Through SRO 769(I) 2018 issued by the SECP here on Wednesday, the SECP has specified conditions for issue of Employee Stock Option Scheme. The draft of the scheme has been issued by the Commission for comments.
The option granted to an employee under the Employee Stock Option Scheme shall not be transferable to any other person except to an entitled employee of a company, the SECP said. Under the regulations, a public company may reserve a certain percentage of further issue for its employees under Employees Stock Option Scheme subject to the laid down conditions.
Firstly, the the articles of association of the company expressly provides and authorizes the issue of scheme. Secondly, only regular/permanent employees who are on the payroll of a company, its holding company or its subsidiary company or directors of a company excluding independent directors, working in and out of Pakistan, shall be eligible to participate in a scheme but do not include an employee who is sponsor of a company; or a director who either himself or through his relatives or through any body corporate, directly or indirectly, holds more than ten per cent of the outstanding equity shares of the company.
Thirdly, the company has consistent track record of distributable profits for the last three years.
Fourthly, the company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to offer scheme.
Fifthly, the company has not defaulted in the payment of a declared dividend to its members or preference shareholders or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such debentures.
Sixthly, the company has not defaulted in payment of any dues of employee to any authority or not honored its commitments under any previously issued scheme.
Seventhly, the board shall form a compensation committee, comprising at least two directors not being executive directors, for administration and superintendence of the scheme provided that the chairman of the compensation committee of listed company shall be an independent director.
Eighthly, the board shall consider and resolve to issue the scheme.
Ninthly, the aforesaid decision of board shall provide particulars required, as applicable.
Tenthly, the offer of scheme is authorized by a special resolution passed at a general meeting of the shareholders provided that for employee stock option scheme, special resolution shall be passed at the general meeting, separately, for the grant of option to employees of a subsidiary or holding company; and grant of option to identified employees, during any one year, equal to or exceeding one percent of the issued capital (excluding outstanding conversions) of the company at the time of grant of option.
In case shares are to be issued at discount to the par value, the company shall also obtain approval of shareholders and the Commission under Section 82 of the Companies Act. The company shall ensure that its executive directors and employees in senior management shall not participate in the deliberation or discussion of their own allocation of options under the scheme.
Moreover, the company shall seek approval of the Commission for issuance of such shares. Thecompany shall ensure compliance with applicable International Financial Reporting Standards.
The company shall not vary the terms of a scheme in any manner which may be detrimental to the interests of its employees provided that a company may by special resolution in a general meeting vary the terms of a scheme offered pursuant to an earlier resolution of a general body but not yet exercised by its employees provided such variation is not prejudicial to the interests of the option holders. The provisions of Regulation 12 shall apply to such variation of terms as they do to the original grant of option.
The terms of reference of Compensation Committee shall, among others, include framing the detailed terms and conditions of a scheme to ensure that the contents of the scheme are in line with the provisions of these regulations and overall financial conditions of the company. The scheme is not only in the interest of the employees but also of its members and options to be granted to employees are in line with the overall compensation policy of the company and no undue favor/injustice is done to/with any employee.
The quantum of option to be granted under a Scheme to each employee and in aggregate and specifying conditions under which option vested in an employee may lapse in case of termination of employment for misconduct.
The exercise period within which an employee should exercise option and that option shall lapse on failure to exercise the same within the exercise period.
The right of an employee to exercise all options vested in him at one time or at various points of time within an exercise period and procedure for making a fair and reasonable adjustment to the number of options and to an exercise price in case of rights issues, bonus issues and other corporate actions.
The SECP said the companies granting option to its employees pursuant to Employees Stock Option Scheme will have the freedom to determine the exercise price.
For setting the exercise price, base price shall be determined i.e. in case of a listed company, the base price must be based on minimum 90 days weighted average market price and in case of an unlisted company, the base price may be based on breakup value per share, earning per share, return on equity, return on assets
etc. or any combination thereof.
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