Sakshi Bhatt , Akshay Sharma
July 4, 2023
Employee stock options (ESOPs) are a type of equity compensation offered by companies to their employees. They give employees the right to purchase company stock at a predetermined price, known as the exercise price, within a specified period of time. ESOPs are usually offered as a part of an employee's compensation package, especially in startups and large corporations. It is a valuable tool used by companies for retention and promoting efforts of their employees. It provides certain rights to their employees for subscription to the share capital of the company and may give them voting rights in the company.
Amid increase in setting up of subsidiary companies by foreign entities in India, this has increased the trend for issuance of ESOPs by foreign holding companies to the employees of their subsidiaries. The rise of startup culture, particularly in the technology industry, has contributed to the increased issuance of ESOPs. Startups often offer stock options as a way to attract talented employees who are willing to take risks in exchange for potential financial gains if the company succeeds.
Benefits for issuance of Employee Stock Options
There are several benefits of offering ESOPs to employees of a foreign subsidiary company in India, including but not limited to:
Key factors to be considered while issuing ESOPs globally
ESOPs issued by foreign companies operate in a similar manner to those issued by domestic companies, but there are some additional considerations:
Governing Laws in India for issuance of ESOPs by overseas parent companies
The issuance of ESOPs by overseas parent companies to the employees of Indian subsidiary companies is subject to various laws and regulations. Here are the key legal aspects and governing laws, as may be amended from time to time, related to issuance ESOPs by overseas parent company in India:
It's important for both the overseas company and the employee to comply with the applicable laws, regulations, and tax obligations.
Compliance Employee Stock Options Under FEMA
The issuance of ESOPs by overseas companies to the employees of their subsidiary companies in India is subject to the provisions of Foreign Exchange Management (Overseas Investment) Regulations, 2022 issued on 22nd August 2022 read with Foreign Exchange Management (Overseas Investment) Rules, 2022 issued by Ministry of Finance.
Any resident individual may make Overseas Direct Investment (ODI) by way of investment in equity capital or Overseas Portfolio Investment (OPI) in the manner provided under the provisions of in the Schedule III and unless otherwise provided hereunder, shall be subject to the overall ceiling under the Liberalised Remittance Scheme of the Reserve Bank.
A resident individual may make or hold Overseas Investment by way of acquisition of shares or interest under Employee Stock Ownership Plan or Employee Benefits Scheme. Provided further that such an acquisition of less than 10 (ten) percent of the equity capital, whether listed or unlisted, of a foreign entity without control, shall be treated as OPI.
A resident individual, who is an employee or a director of an office in India or branch of an overseas entity or a subsidiary in India of an overseas entity or of an Indian entity in which the overseas entity has direct or indirect equity holding, may acquire, without limit, shares or interest under Employee Stock Ownership Plan or Employee Benefits Scheme or sweat equity shares offered by such overseas entity, provided that the issue of Employee Stock Ownership Plan or Employee Benefits Scheme are offered by the issuing overseas entity globally on a uniform basis.
A person resident in India other than a resident individual making any Overseas Portfolio Investment (OPI) or transferring such OPI by way of sale shall report such investment or transfer of investment within 60 (sixty) days from the end of the half-year in which such investment or transfer is made as of September or March-end. Provided that in case of OPI by way of acquisition of shares or interest under Employee Stock Ownership Plan or Employee Benefits Scheme, the reporting shall be done by the office in India or branch of an overseas entity or a subsidiary in India of an overseas entity or the Indian entity in which the overseas entity has direct or indirect equity holding where the resident individual is an employee or director.
With the increasing globalization of businesses, companies are expanding their operations across borders. As a result, ESOPs are being issued by multinational companies to employees in different countries. This trend reflects the need to attract and retain talent globally and the desire to create a unified company culture and sense of ownership among employees worldwide. It's important to note that while the ease of issuing ESOPs can vary, it is typically recommended to consult with legal, financial, and tax professionals with expertise in the relevant jurisdiction to ensure compliance with applicable laws and regulations. They can provide guidance on the specific requirements and processes involved in issuing ESOPs, making the implementation process smoother.
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