Issue OF ESOP By The Foreign Company To An Indian Employee

Employee stock options ("ESOPs") have been utilised as a successful retention strategy around the world. 

Diverse international companies with current operations in India as well as investors who want to establish new operations in India or buy existing ones, may explore cross-border ESOP models. 

Additionally, Indian businesses can provide ESOPs to workers at their international holding, subsidiary, or joint venture firms. 

In this essay, numerous cross-border ESOP arrangements are discussed, and important issues related to Indian corporate, foreign exchange, and tax legislation are pointed out.

What is ESOP?

ESOP is the full name of the Employee Stock Ownership Plan. In accordance with this strategy, businesses provide their staff with company shares at little to no additional cost, which they may cash out at a set price after a set amount of time. Examples of ESOPs in India include those that Flipkart, Myntra, and other startups offered when they were just getting started.

How does ESOP work?

The quantity of ESOP shares provided their price, and the employees who will get them are all decisions made by the employers. After that, employees are given ESOPs with a grant date specified.

The vesting period is the time frame after an ESOP has been issued, during which it remains in a trust fund. 

Employees must remain with the company for the vesting term to take advantage of stock ownership through the ESOP exercise.

Once the vesting period is over, employees are permitted to exercise their ESOPs. The period during which the employee has accrued the right to obtain company shares is mentioned. 

Employees may use their ESOPs to purchase discounted company shares after the vesting period has ended. The employees may earn money if they decide to sell their shares in the future.

The employer must, however, purchase back the ESOP at its current market value within 60 days if an employee departs the organisation or retires before the conclusion of the vesting term. 

This guarantees that the employee will only suffer an unfair disadvantage if their ESOP completely vests.

Inbound and Outbound Cross-Border Options

• international corporations give Indian employees incentives

Foreign companies may grant stock options under their ESOP plans to employees or directors of their Indian offices (referred to as "Foreign Options") under certain conditions: 

(i) the Foreign Options are offered globally on an equal basis; 

(ii) The Indian office submits an annual return detailing how Indian workers exercised their foreign options; and

(iii) amounts payable on the sale of any shares held as a result of the exercise of the Foreign Options by Indian employees.

The foreign company, as outlined in the ESOP scheme/offer document, has the option to buy back the granted or vested Foreign Options and the shares acquired through the exercise of those options. 

If this occurs, the Indian office of the foreign company is responsible for filing an annual return that includes details about the repurchase and any remittances made. 

This annual return is necessary to ensure transparency and compliance with Indian regulations.

• Indian corporations' incentive programmes for hiring foreign workers

The employees and directors of an Indian firm's holding company, joint ventures, or subsidiaries outside of India may get ESOPs (also known as "Indian Options") or sweat equity shares under the conditions of the Indian Foreign Direct Investment Rules ("FDI Policy"). 

Indian companies must comply with the Indian Companies Act, 2013 ("Companies Act"), applicable limits, and related conditions related to the foreign direct investment amount under the FDI Policy to:

• grant Indian Options under their ESOP scheme, and 
• file a return with the central bank within 30 days of issuing Indian Options.

 When completing this return, the Indian company will also need to provide certificates attesting to conformity with Indian law.

Employees or directors of the firm or a subsidiary or holding company may be granted ESOP/Indian Options, whether they are based in India or elsewhere. 

According to the Companies Act, companies (except startup companies) are not permitted to offer ESOPs to:

• Employees who are promoters or members of the promoter group, or
• Directors who own more than 10% of the company's outstanding equity shares, whether directly or indirectly, through family members or other corporations.

According to this legislative framework, ESOP plans should be properly drafted and include explicit parameters for option award, vesting, and liquidation. 

The conditions of the ESOP plan frequently provide for an acceleration of ESOPs if the firm is acquired.

Consequently, potential investors should evaluate and arrange the impact of an acquisition by analysing the ESOP scheme's conditions, particularly whether it would cause accelerated vesting, exercise, or lapse of the ESOPs.

Permission to purchase/acquire foreign securities in specific circumstances.

• There are several options for a person residing in India to purchase overseas securities:

(i) Foreign securities may be given to you as a gift from someone outside India.

(ii) Under a business's Cashless Employees Stock Option Scheme, you may also obtain foreign securities from a company established outside of India as long as no funds are moved from India.

(iii) You may also acquire foreign securities if you inherit them from a family member who resides in India or elsewhere.

• You may be eligible to take shares under the business's Employee Stock Option Plan if you are a resident of India and a director or employee of a foreign company's Indian office, branch, or subsidiary or of an Indian company in which foreign equity ownership is 51% or more (ESOP).

(i) the issuing corporation must offer the shares through the ESOP uniformly and universally across the world.

(ii) The Indian firm must also submit an Annual Return to the Reserve Bank of India via an approved dealer bank that includes information on any remittances made as well as the recipients of these remittances.

• If you are entitled to acquire shares under an Employee Stock Option Plan (ESOP) scheme (2), an authorised dealer bank may authorise the transmission of money for this reason. This is true regardless of how the scheme is implemented.
• A person residing in India may sell shares that were acquired following sub-regulations (2) and (3) above as long as the proceeds are repatriated as soon as they are received and, in any case, no later than 90 days from the day the securities were sold.
• A foreign business that issued shares in line with sub-regulation (2) of the rule may buy them back under the following circumstances:
• The shares were issued following the 1999 Foreign Exchange Management Act guidelines.
• According to the original offer contract terms, shares are being repurchased.
• The approved dealer bank sends a yearly report detailing transactions, beneficiaries, and remittances.
• A buyer of shares who satisfies the prerequisites mentioned in the sub-regulation may transfer funds with the permission of an authorised dealer bank (2).

In India, how is the ESOP taxed?

The difference between the exercise price and the fair value of the shares, as determined on the exercise date, is taxed as a grant at the time of allocation (as part of the salary). 

The employer subtracts the TDS from the value of the benefit determined in this manner.

As more taxes are withheld from the salary without extra inflows, this negatively affects cash flow. 

Keep in mind that only stock allocations are taxed; option allocations are not (commonly known as option allocations). 

When an employee exercises an option and subsequently pays taxes, shares are granted.

For instance, following the company's stock option plan, Mr X will be issued 10,000 shares of Company A (employer). 

The value of Mr X's taxable shares is (200-10) * 10,000 = 19,000 if the market price of the shares on the option date is 200 shares per share and the exercise price is 10.

If appropriate, the extra fee will be subtracted from 19,000 at a rate of 34.32% (including 4% disposal), assuming Mr X pays a maximum tax rate of 10%. An extra TDS deduction of 6.52.080 will be made as a result.

The employees must meet this obligation to be paid at vesting through the sale of a small number of shares or other means. The second capital gains tax incident takes place.

ESOP distributed by a foreign firm:

ESOPs are frequently given to employees of Indian subsidiaries by foreign parent businesses. 

Allocations' tax treatment is unaffected by this. It is still subject to taxation as a gift, and the employer (an Indian corporation) is obligated to withhold TDS.

The ITR must include these shares as foreign assets since ITR 1 cannot be submitted, which raises the difficulty of compliance.

The issue is whether capital gains are taxed when these shares are sold in India or in the taxable foreign countries that own them. The answer is dependent upon where you dwell; the resident gets taxed on his worldwide income.

Read more,

ESOP Terms : A term that all founders need to know

How does ESOP work in India? Benefits of ESOPs

Conclusion

ESOPs and the numerous equity-based incentive systems mentioned above make employee recruitment, motivation, incentives, and retention easier. 

Before choosing the ESOP structure best suited for the firm's unique requirements and business goals, whether foreign or Indian, in each case, the interests of all relevant stakeholders must be evaluated against each form of ESOP structure. 

The requirement to generate value for workers, tax efficiency, and permissibility under Indian corporate and foreign currency legislation are the primary factors that determine the optimum form for ESOPs. 

The second crucial factor to take into account is how the ESOP will be administered.

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FAQs related to Issue of ESOP by the foreign company to an Indian employee

1. How do ESOPs work?

An employee benefits programme, an ESOP (Employee Stock Option Plan), enables workers to acquire company stock at a discounted price.

2. Can Indian employees receive ESOPs from a foreign company?

Yes, as long as the corporation conforms to Indian rules and regulations surrounding stock options and employee perks, a foreign company may provide ESOPs to Indian workers.

3. What must legal conditions be met before a foreign business can give ESOPs to employees in India?

The Securities and Exchange Board of India (SEBI) rules, the Income Tax Act of 1961, the Indian Companies Act, and any other applicable laws and regulations must all be complied with by the foreign firm.

4. What tax repercussions can employees in India who get ESOPs from a foreign business face?

An Indian employee who obtains ESOPs from a foreign business would have to pay taxes on the money they make when they exercise their stock options. Similarly to this, a withholding tax may be imposed on payments provided to the employee by the foreign business. It is advised to speak with a qualified tax expert to comprehend this circumstance's tax ramifications fully.

If you are looking for any Employee stock option plan ESOP services or consultants in Noida, Delhi, Gurgaon or anywhere in India, write to us at accounts@especia.co.in. Or Call On :(+91)-9711021268 +91-9310165114