Aug 9, 2024
ESOP Taxation Simplified
Employee stock options (‘ESOPs’ or ‘Options’) are very common instrument for sharing wealth generated by employees, by way of compensation.
Managing employee stock options effectively is critical for private companies in India. Part of this compliance is maintaining accurate statutory records. One such mandatory document is Form SH-6—an employee register format prescribed under the Companies Act, 2013.
To ensure transparency, compliance, and proper record-keeping of these plans, the Companies Act, 2013 mandates the maintenance of Form SH-6. If your company issues stock options, maintaining Form SH-6 properly is not just good governance—it’s a legal requirement.
This guide covers everything you need to know about Form SH-6, its importance, and how to prepare it accurately.
Form SH-6 is a statutory register that Indian companies must maintain to record the details of Employee Stock Option Plans (ESOPs) granted to employees. It is officially titled "Register of Employee Stock Options" under Rule 12(10) of the Companies (Share Capital and Debentures) Rules, 2014.
Essentially, Form SH-6 provides a structured way to track all ESOPs—issued, vested, exercised, and lapsed—along with details about the employees holding these options.
Maintaining a proper Form SH-6 is not just a regulatory requirement but offers several significant advantages:
1. Legal Compliance: Companies issuing stock options must maintain Form SH-6 to comply with the Companies Act, 2013. Failing to maintain it can lead to penalties.
2. Transparency: The register ensures transparent record-keeping of all stock options, which builds trust among employees and stakeholders.
3. Audit Readiness: During statutory audits, especially in due diligence for fundraising or acquisitions, the SH-6 register is reviewed to verify ESOP issuances.
4. Employee Relations: Accurate record-keeping fosters trust among employees by clearly documenting their stock option entitlements, vesting schedules, and exercise rights.
5. Governance: It helps companies monitor stock option dilution, vesting conditions, and exercise timelines, ensuring proper governance of equity-based compensation.
Form SH-6 follows a structured format capturing comprehensive details about ESOPs. The key components include:
1. Employee Details: Name, employee ID, department, designation, and date of joining.
2. Stock Option Grant Information: Grant date, number of options granted, exercise price per share, vesting schedule (including cliff period and vesting percentages), vesting conditions (time or performance-based), and exercise period.
3. Exercise Details: Date of exercise, number of options exercised, amount paid, and number of shares issued upon exercise.
4. Lapsed or Cancelled Options: Number of options lapsed or cancelled, date of lapse, and reasons such as resignation, termination, or expiry.
5. Transfer or Sale of Shares (if applicable): Details of share transfers or sales post-exercise, including transferee name, date, and amount.
6. Approval and Signature: Dates of ESOP scheme approval, board or committee resolutions, and authorized signatories certifying the accuracy of the register.
This detailed information ensures a comprehensive record of all ESOP-related activities for each employee.
The requirement to maintain Form SH-6 applies to:
1. Private Limited Companies issuing ESOPs.
2. Public Limited Companies, whether listed or unlisted, offering stock options to employees.
3. Listed Companies must also comply with SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, in addition to maintaining Form SH-6.
Typically, the responsibility of maintaining this register lies with the Company Secretary or compliance officer, who must ensure timely and accurate entries.
Even if options are granted to directors, advisors, or consultants (where permissible), their records must be maintained in SH-6. It’s important to note that companies must keep the register at the company’s registered office and make it available for inspection by directors and authorized officers.
Maintaining an accurate ESOP register in Form SH-6 requires a methodical approach to capture all relevant details of stock options granted to employees. Below is a refined step-by-step process to ensure compliance and clarity:
Start by compiling essential employee data such as full name, employee identification number, department, designation, and date of joining. This foundational information links each stock option grant to the correct individual.
For every grant made under the ESOP scheme, note the grant date, the total number of options allotted, and the exercise price per share. Ensure these entries align with the terms approved in the ESOP plan.
Document the vesting timeline clearly, including any cliff periods and subsequent vesting milestones. If vesting depends on performance or other conditions, these must be explicitly recorded to track eligibility accurately.
Whenever an employee exercises their stock options, promptly update the register with the exercise date, the quantity of options exercised, and the amount paid. This maintains a transparent record of options converted into shares.
Options that are not exercised within the stipulated period or are forfeited due to resignation, termination, or other reasons should be recorded with the corresponding dates and causes. This ensures a clear audit trail and compliance with regulatory requirements.
If employees transfer or sell shares acquired through exercising options, include details such as the transferee’s name, transaction date, and sale amount to maintain comprehensive ownership records.
All entries should be backed by the relevant approvals from the board or ESOP committee. Finally, authorized signatories must validate the register, certifying its accuracy and completeness.
Form SH-6 is an indispensable document for companies issuing Employee Stock Options under the Companies Act, 2013. It serves as the official register capturing every detail of ESOP grants, vesting, exercises, lapses, and transfers. Maintaining this register not only ensures legal compliance but also strengthens corporate governance and employee trust. While manual maintenance can be tedious, leveraging digital platforms can simplify record-keeping, ensuring accuracy and timely compliance.
For companies committed to transparent and efficient ESOP management, Form SH-6 is the cornerstone of maintaining a clear and trustworthy equity compensation framework.
