Employee Stock Option Plan (ESOP) - Reaching to conclusion

RECAP of ESOPs

Some more facts related to Trusts, Special resolution required, Cost to company, Maximum number of shareholders, Disclosures in Board report and many other technical aspects related to issue and maintain ESOPs.

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FEMA provisions on ESOPs:

Applicability: In case ESOPs are offered to employees working outside India, the FEMA provisions shall only then additionally apply, otherwise Not applies.

Applicable provisions of FEMA (Transfer or issue of security to a person resident outside India) Regulations, 2000 (FDI Regulations) & Consolidated FDI Policy, 2015 issued from time to time are as under:

Definition under FDI Regulations:

“2 (iif) “employees‟ stock option” means the option given to the directors, officers or employees of a company or of its holding company or joint venture or wholly owned overseas subsidiary/subsidiaries, 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.”

Regulation 8 of FDI Regulations:

(1) An Indian company may issue ESOPs and/or Sweat equity shares to its employees/directors or employees/directors of its holding company or joint venture or wholly owned overseas subsidiary/subsidiaries who are resident outside India, provided that :

a. The scheme has been drawn either in terms of regulations issued under the SEBI Act or the Companies (Share Capital and Debentures) Rules, 2014 under the Companies Act 2013, as the case may be.

b. The ESOPs/Sweat equity shares issued to non-resident employees/directors under the applicable rules/regulations are in compliance with the sectoral cap applicable to the said company.

c. Issue of ESOPs/Sweat equity shares in a company where foreign investment is under the approval route shall require prior approval of the Foreign Investment Promotion Board (FIPB) of Government of India.

d. Issue of ESOPs/Sweat equity shares under the applicable rules/regulations to an employee/director who is a citizen of Bangladesh/Pakistan shall require prior approval of the Foreign Investment Promotion Board (FIPB) of Government of India.

(2) The Reserve Bank may require the company issuing ESOPs/Sweat equity shares to submit such reports and at such frequency as it may consider necessary.

Para 3.5.5 of Consolidated FDI Policy, 2015:

(i) “Listed Indian companies are allowed to issue shares under the Employees Stock Option Scheme (ESOPs), to its employees or employees of its joint venture or wholly owned subsidiary abroad, who are resident outside India, other than to the citizens of Pakistan. ESOPs can be issued to citizens of Bangladesh with the prior approval of FIPB. Subject to this, Government approval is not required for issue of ESOPs in sectors under automatic route. Shares under ESOPs can be issued directly or through a Trust subject to the condition that:

(a) The scheme has been drawn in terms of relevant regulations issued by the SEBI, and

(b) The face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5 per cent of the paid-up capital of the issuing company.

ii) Unlisted companies have to follow the provisions of the Companies Act, as applicable. The Indian company can issue ESOPs to employees who are resident outside India, other than to the citizens of Pakistan. ESOPs can be issued to the citizens of Bangladesh with the prior approval of the FIPB. Subject to this, Government approval is not required for issue of ESOPs in sectors under automatic route.

(iii) The issuing company is required to report (plain paper reporting) the details of granting of stock options under the scheme to non-resident employees to the Regional Office concerned of the Reserve Bank and thereafter the details of issue of shares subsequent to the exercise of such stock options within 30 days from the date of issue of shares in Form FCGPR.”

Granting of ESOP- Reporting to Regional Office of RBI.

Exercise of ESOP- Advance reporting to be filed with RBI within 30 days from receipt of amounts.

                                Form FC-GPR to be filed within 30 days from allotment of shares to the employees.

Sale of shares granted under ESOP- Form FC-TRS to be filed within 60 days from the date of receipt or payment of the amount of consideration. The onus of submission of the form FC-TRS within the specified time shall be on the transferor / transferee, resident in India.

However, in cases where the NR investor, including an NRI, acquires shares on the stock exchanges under the FDI scheme, the investee company would have to file form FC-TRS with the AD Category-I bank.

In case the investment is made under Schedule IV:

The sale/maturity proceeds (net of applicable taxes) of shares or convertible debentures purchased under this Scheme shall be credited only to NRSR account where the

purchase consideration was paid out of funds held in NRSR account and to NRO or NRSR account at the option of the seller where the purchase consideration was paid out of inward remittance or funds held in NRE/FCNR/NRO/NRNR account.

Revision of FEMA Compliances:

Where non-resident employee are offered ESOS scheme, the company is required to comply with terms and conditions specified FDI-master circulars issued under sub-section (3) of Section 6 of the Foreign Exchange Management Act, 1999 read with Notification No. FEMA 20/2000- RB dated May 03, 2000 from time to time.

Eligibility and quantum of ESOS: 

Employees of its joint venture (It should be a subsidiary under as companies Act ) or wholly owned subsidiary abroad who are resident outside India, other than to the citizens of Pakistan are eligible to participate in ESOS upto 5% of paid-up share capital of the company. Citizens of Bangladesh can invest with the prior approval of the FIPB.

Reporting no. 1 -Intimation of granting of options to RBI in plain paper- 

The issuing company is required to report the details of issuance of ESOPs to its employees to the Regional Office concerned of the Reserve Bank, in plain paper reporting, within 30 days from the date of granting of ESOPs.

Reporting No. 2-Advance reporting of application money: 

The Company after receipt of share application money from non-resident employee within 30 days shall report in Advance Reporting Form enclosed in Annex – 6 of FEMA FDI circular together with KYC and copy of FIRC through its authorised dealer through it received inward remittance.

Reporting No.3 –Filing of FC-GPR: 

Further, at the time of allotment of shares for options exercised by non-resident employees, the company shall report to the Regional Office of the Reserve Bank in form FC-GPR, within 30 days of allotment of such shares together with valuation report and certificate from Company Secretary of company or practicing company, through its authorised dealer through which it received inward remittance.

Taxation of ESOPs:

Like in many countries, in India, the income tax is levied on ESOS two times at time of exercising the options granted to employees as perquisite as part of salary income tax at normal rate of taxation and another time over the capital appreciation at time of selling of shares as capital gain tax. It may be short term capital gain or long term capital gain. However in case of equity listed company, there will not be any capital gain taxation over the capital appreciation at time of selling of shares if employee holds more than 12 months and the sale proceeds are subjected to Securities Transaction Tax (STT).

1. At the time of exercise of options: The first stage is when the options are exercised by the employee. The benefit, which is the difference between the Fair Market Value (FMV) of the shares on the date of which the option is exercised and the amount at which the options were granted to the employee, is treated as a perquisite as per Income Tax Act, 1961.

2. At the time of sale of shares: The second stage is when the shares are sold or transferred by the employee, in which case, the difference between the sale consideration and the FMV of the shares would be treated as a capital gain and will be subject to capital gains tax.

Other Relevant Points 

1. After exercising of options, allotment has to be done, the procedure for issuing share certificates is same normal. Nothing new has to be done for ESOPs share.