Whether Consultants like Doctors can be issued ESOPs

[By Arham Anwar & Suvanwesh Das]

The authors are students of the National Law University, Jodhpur and the National Law University, Odisha.

Introduction

We have always seen doctor’s job as a noble profession but with changing times new questions of law have evolved and new dynamics have been added to supposedly simple concepts. This article seeks to address the issue of whether consultants like doctors can be issued ESOPs under provisions of Companies Act, 2013. This question is especially pertinent because after the COVID-19 pandemic the world has seen rapid emergence of companies providing health care and pathological services. Thus, new complexities have arisen as to whether doctors employed by these companies can be treated as an “employee” .Also if they come under the ambit of employees then can they be given all the benefits that employees of any company are eligible to. The article will first discuss the legal provisions pertaining to ESOPs and the definition of employee(s) under different legislations andthen  relevant case laws will also be taken into consideration as to whether doctors can come under the ambit of employee(s) and finally conclude with our findings.

Legal Provisions Pertaining to ESOPs

Employees Stock option is defined under Section 2(37) of the Companies Act, 2013 as an “option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price”.

Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 talks about of issue of employee stock options-“A company, other than a listed company, which is not required to comply with Securities and Exchange Board of India Employee Stock Option Scheme Guidelines shall not offer shares to its employees under a scheme of employees’ stock option (hereinafter referred to as “Employees Stock Option Scheme”), unless it complies with the following requirements, namely:-(1) the issue of Employees Stock Option Scheme has been approved by the shareholders of the company by passing a special resolution.

Explanation: For the purposes of clause (b) of sub-section (1) of section 62 and this rule ‘‘Employee’’ Means

  1. a permanent employee of the company who has been working in India or outside India; or
  2. a director of the company, whether a whole-time director or not but excluding an independent director; or
  3. an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company but does not include-
  4. an employee who is a promoter or a person belonging to the promoter group; or
  5. a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company”

As per section 62(1) (b) of the Companies Act, an unlisted private limited company can issue further shares to employees under the scheme of Employees Stock Option (“ESOPs”), pursuant to a special resolution. If we look at Rule 12 of (Share and Debentures) Rules 2014 it clearly says that ESOPs can only be issued to an employee and Rule 12(1) goes on to define who can be called an employee. A plain reading of Rule 12 (1)(c) of the same talks about entities which are not to be counted as an employee and after reading all these provisions we can very well conclude that doctors can come under the ambit of employee under Rule 12 of (Share and Debentures) Rules 2014.

If we read Rule 1(4) of the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, it specifies that it can be applied to any company whose equity shares are listed on a recognised stock exchange in India ,further Rule 2(i) of the same defines the term “employee “.AlsoRule 4 makes any employee eligible to participate in the schemes of the company as determined by the compensation committee. Here also no bar regarding inclusion of doctors can be observed. In addition to that, SEBI suggested that definition of “employee” should be changed to include non-permanent employees provided that they are designated as employees by their employers and are exclusively working with such company or its group company including subsidiary or its associate company or its holding company in ESOPs benefits as was reflected in SEBI FAQs.

It is also important to note that present regulations such as The Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 relating to Professional Conduct of Registered Medical Practitioners don’t contain any explicit restrictions that prevent doctor(s) from being engaged as an employee(s). On top of that Union Ministry of Health and Family Welfare launched ICMR/DHR Policy on Biomedical Innovation & Entrepreneurship for Medical Professionals, Scientists and Technologists at Medical, Dental, Para-Medical Institutes/Colleges. According to the policy, medical experts and doctors will be encouraged to explore entrepreneurial endeavours by building start-up firms, accepting adjunct positions in Companies as Non-Executive Directors or Scientific Advisors, or by joining them as Scientific Advisors. The doctors will also be allowed to work alone or through companies on inter-institutional and industry projects, licence technologies to corporations for commercialization, and generate income for their own support as well as the benefit of society. The medical professionals will also be allowed to take a break to translate and commercialise their innovations through the establishment of their start-up companies with the medical institute’s approval in which they may be working. The goal of this policy is to support entrepreneurship growth and the development of Make-in-India products while also promoting interdisciplinary collaboration, innovation, technological development, and skill development. As we look at catena of judgements given by different High Courts, position pertaining to status of doctors as an employee will be clarified.

Case Laws

In the case of Commissioner of Income Tax (TDS), Pune vs. Grant Medical Foundation, the issue of law which arose was whether there existed a relationship of employer and employee between the assesse. Moreover a really important question that arose was can the consultant doctors be employed in the hospital. The court in this case held that in respect of doctors employed in the hospital drawing only variable pay with or without a written contract, it can’t be said that they were employees of the hospital. There is no prohibition or bar on them being associated with the other hospitals. Whereas in respect of doctors drawing fixed plus variable pay with written contract, satisfies the criteria applied by the courts to determine whether a person is an employee or not. Furthermore, in this scenario contractual stipulations have to be read as a whole and together to arrive at a conclusion as to whether it denotes a master servant or employer-employee relationship.

Furthermore, a similar line of thought was extended by the Madras High Court in Dr. Mathew Cherian v. Assistant Commissioner Income Tax in which it noted that the terms of contract of employment and other guidelines issued by the hospital can be used to determine whether an employer-employee relationship exists or not.

But this distinction pertaining to definition of employee was further elaborated by Andhra Pradesh High Court in Commissioner of Income Tax (TDS) vs. Yashoda Super Speciality Hospital, where the court noted that in case of agreement between the doctors and the assesse, if there is no provision for employee benefits like payment of Provident Fund and Gratuity, then there can’t exist any employee-employer relationship.

The similar question pertaining to employee benefit like Provident fund was again raised in the case of Employees Provident Fund Organisation v. Employees Provident Fund Appellate Tribunal in which court held that consultant doctors can’t be employees within the meaning of the Employee’s Provident Funds Act, 1952.

The Gujarat High Court in the case of Commissioner of Income Tax v. Apollo Hospitals International Ltd. had taken into account the type of payments made to full-time resident doctors at Apollo Hospital International Limited. The hospital engaged into two different kinds of contracts, one for employee doctors and the other for consultant doctors. There were list of benefits for “employee doctors” including Basic Salary, House Rent Allowance (HRA), Transport Allowance, Education, Telephone, and Other Allowance. On the other hand, there was a provision for lump sum monthly payments in the case of “consultant doctors” and were not considered for any allowances as compared to employee doctors. Consultant doctors were not eligible for a number of benefits that were available to employee doctors. The job for “employee doctors” was full-time, and they were not entitled for any other full-time employment or private practice whereas no such bar was there on the consultant doctor.

Thus, from catena of the judgements given across by different High Courts it has been maintained that where doctors are given similar benefits as employees apart from the fixed remuneration such as gratuity, provident fund, HRA etc., they can be considered as an employee of the establishment but they can very well be hired as a consultant and won’t come under the ambit of employee.

Conclusion

The above legislative provisions and the case laws makes it clear that doctors can be employed as either “employees” or “consultant”. Employee doctors will have access to several benefits like PF, Gratuity, HRA, TRA which are usually not accessible to a consultant doctor.

Thus, consultant doctors by the very reason of not being an employee won’t be eligible for ESOPs and the company can surely structure different modes of stock incentive plans but not the statutorily regulated ESOPs. However, when we look at Rule 12 1(b) of Companies (Share Capital and Debentures) Rules, 2014 other than employees, directors holding less than 10% of outstanding equity shares of the company are eligible for ESOPs. And there are no legislative restrictions on registered medical practitioner from becoming a director of a company and thus they can be entitled to ESOPs.

On the other hand, it can be interpreted that “employee doctors” hired by the company can be issued ESOPs further if the company is a registered one, contractually hired doctors can also be issued ESOPs as SEBI (Share based Employee Benefits and Sweat Equity) Regulations, 2021.

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