Phantom Stock Option (“PSO”) is the new concept for incentivizing the employees of the companies. PSOs are increasing and getting popular as the companies share the profit with the employee without dilution of the shareholding of the companies, dividends, or voting rights.
How does it work?
The companies offer their employees attractive packages and rewards so that those employees can work for a long time; particularly for their key employees. The incentive includes employee stock options, stock appreciation rights, and other benefits such as bonuses, medical benefits, and other general benefits.
The concept of the ‘Phantom Stock Option’ is similar to stock appreciation right. Phantom Stock Option is an option on performance through which an employee is entitled to receive a monetary benefit after a certain period or on fulfilment of some criteria. The payment is based on the valuation of the share price of the company. However, it is different from the employee stock option as in the case of the employee stock option, employees are given equity shares in companies whereas, in PSO, monetary benefits are offered. Although, it is not beneficial for those employees who want equity share in the company rather than case incentive.
Phantom stock option has been divided into two types for basic payout. “Appreciation Plan” & “Full Value Plan.” Appreciation plan is the amount of cash that shall be paid to the PSO holder and is equivalent to the appreciation in the stock from the date of grant of option to the date of vesting of right. E.g. ‘A’ was granted 100 phantom stock options in January 2023. The share price was Rs. 50 when issuing the stock with a five-year vesting period. After five years, the share price is appreciated from Rs. 50 to Rs. 80. In January 2028, ‘A’ will get Rs. (80-50) x 100 shares= Rs. 3000 which is the appreciated value.
In the full value plan, the amount is equivalent to the value of stock at the date of vesting. E.g., after five years, ‘A’ will get Rs. (80 x 100) = Rs. 8000 which is the full value.
The taxability of the income received under the Phantom Stock Option under the head of salary as perquisites, the incidence of tax will not fall with the employer at the time of making of the payment. The tax will be deducted from the hand of the employee.
The Companies Act 2013 has prescribed the option to issue shares to the employee under the stock option under section 62 (1)(b) of the 2013 Act. The SEBI (Securities and Exchange Board of India) (ESOS and ESPG) regulation read with the Companies Act, 2013 prescribed the regulation for the issue of equity share to the employee.
Informal guidance in relation to the Phantom Stock Option
SEBI had given informal guidance in the case of Mindtree Limited. The authority said that if the scheme has not involved issuing security to the employee, it will not be categorised under the SEBI Employee Benefit Regulation 2021. In the case of Mindtree Limited, it does not involve the purchase or issue of shares to the employee but it was cash appreciation to its employee, SEBI clarified that Employee Benefit Regulation would not be applicable.
“Regulation 1(4) of the SEBI Employee Benefit Regulations” in its correspondence considering Mindtree’s request for guidance.
“Regulation 1(4) states that the SEBI Employee Benefit Regulations apply to employee benefit plans contrived by public corporations assuming specific conditions are met,” including that the employee benefit includes managing in, preferring, or buying protections of the organisation, straightforwardly or by implication. The Mindtree Phantom Stock Scheme did not involve qualified employees buying or preferring the organisation’s shares at the hour of activity of the right, but instead cash payouts for expansions in the organisation’s part costs. “SEBI clarified that the SEBI Employee Benefit Regulations would not make a difference to Mindtree Phantom Stock Scheme because of the limitations of Regulation 1(4).”
How is it different from the Employee Stock Option Plan (“ESOP”)?
Employee stock option or purchase plan is the most effective method to incentivize the employee and keep them within the organisation. Upon the fulfilment of the criteria, the employee becomes eligible to buy or subscribe. ESOP has been issued by the listed companies and particularly falls under the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. Employee stock option plan through which companies issue equity shares to their employees below the market price under the predetermined scheme.
If any unlisted companies issue a share to its employee, then those companies will issue the share under Section 62 (1) (b) of the Companies Act, 2013 read with rule 12 of the Companies (shares and debentures) rule, 2014.
The phantom stock option is the nomenclature of the stock appreciation right, the PSO holder is directly entitled to the cash. The employees are eligible for the PSO after fulfilment of certain criteria and a specific period which is linked with the appreciation of share and valuation of the share. The phantom stockholders are not entitled to voting rights in the company. There is no such SEBI regulation or statute to regulate the PSO.
Phantom Stock Option is not covered in any of the laws and regulations. However, it should be brought under the purview of the Companies Act and the SEBI (Securities and Exchange Board of India) to protect the interests of the stakeholders. Otherwise, the companies that lack acknowledgement of their employees’ efforts might exploit PSO as a loophole.