The government proposes to limit the amount of equity a company may offer under an employee stock option scheme to five per cent of the total capital after the issue is made.

The government has laid down guidelines for companies wanting to issue ESOPs in the Companies (amendment) Bill 2003, adding that in the case of listed companies, Securities and Exchange Board of India norms on ESOPs will be applicable instead.

"A company may, at any time, increase its subscribed capital by giving an option to its employees, officers or working directors to purchase securities pursuant to a scheme of option framed by the company," according to the Bill, which was introduced in Parliament in the recently-concluded Budget session.

It also adds that every employee stock option shall be made "in such a manner that the amount of issue of shares under the ESOP and the share in the capital does not exceed more than five per cent of the amount of total capital after such issue."

Government's recommendations on ESOPs follow close on the heels of the Department of Company Affairs planning to issue detailed guidelines on sweat equity and preferential allotments for unlisted companies.

DCA had appointed a 12-member panel headed by Indian Institute of Management professor J R Verma in August last year to finalise these norms for unlisted companies and the panel is expected to submit its final report soon.

The committee's suggestions are expected to be notified by DCA under Section 79 (A) of the Companies Act.

Among other things, the Verma panel has been mandated to look into issues like how much of a company's equity should be allowed under sweat equity plans and how these deals should be treated in the company's accounts.

The committee also comprises of a Sebi nominee. Sebi already regulates these issues for all listed companies and its input would be vital in the case of unlisted ones.

Other members of this committee include a nominee from the Reserve Bank of India, besides two each from the Institute of Chartered Accountants of India and the ministry of commerce besides DCA officials.