Employee Share Scheme
Section 95(1)(c) of the Companies Act defines an employee share scheme as a company-created initiative for employee participation through share issuance or options. These schemes primarily aim to motivate employees to acquire shares in their employer company.
The structuring of an employee share scheme focuses on promoting gender diversity and black ownership, attracting and retaining top talent. Key structural considerations include:
- Class of Shares: Options between ordinary shares with voting rights or restricted shares.
- Percentage Allocation: Determining the portion of the company’s equity allocated to the scheme.
- Vesting Schedule: Deciding whether shares are allocated immediately or over time, along with defining minimum tenure for share sale.
Exit condition policies need to be established regarding circumstances like resignation, retirement, or dismissal. On tax and financial implications, employees face Income Tax (Section 8C of the Income Tax Act), Dividends Tax (at 20%), and potential Capital Gains Tax upon share sale.
Different vehicles for the share scheme include:
- Direct Equity Share Scheme: Participants receive actual shares.
- Phantom Share Scheme: A cash-based benefit tied to share performance without actual shares being awarded.
- Ownership via a Trust: A trust holds shares on behalf of participants.
Funding Options:
Goal Best Funding Options
Company wants to maintain control while funding shares – Employee Trust
Employees invest their own money – Self-funded (Cash Purchase)
Employees get ownership with the company’s assistance – Company-Funded Loan or Bonus
Employees pay overtime from the company’s profits – Vendor Financing
Employees take external loans – Third-Party Bank Loans