A company registered under the Indian Companies Act, 2013 (‘Companies Act’) raises share capital in different forms by issuing different classes of shares and securities, of which a company can issue certain shares benefiting its employees, directors and other officers in the form of Employee Stock Option Plan (‘ESOP’), and other share based benefits to the employees such as employee stock purchase scheme, Stock appreciation rights scheme, sweat equity shares, etc. (collectively referred as ‘Share Based Employee Benefits’). These issuances by Indian company are being regulated in India by the Securities Exchange Board of India (‘SEBI’).
As per the Companies Act ‘Employees Stock Option’ is a scheme under which options are granted to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, giving them the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price.
Issuance of Share Based Employee Benefits by an Indian entity to an employee residing outside India
The options granted to an employee residing outside India qualifies as foreign direct investment (‘FDI’) in the books of Indian company. The Indian company issuing Share Based Employee Benefits to an employee residing outside India must be in compliance with the provisions of Foreign Exchange Management Act 1999 (‘FEMA’) and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’) and regulations made thereunder, which involves reporting of such grant of options to the Reserve Bank of India in Form ESOP within 30 days from the date of issue of options.
Upon vesting and exercise of these options by the employee and issuance of equity shares to the employee as a result of exercise of options by the company, Form FC-GPR should be filed by the company reporting the receipt of FDI within 30 days from the date of allotment of equity shares subject to sectoral caps and other conditionalities prescribed under the NDI Rules.
Issuance of Share Based Employee Benefits by an overseas entity to a resident individual in India
Similarly, an entity incorporated outside India (overseas entity) may issue Share Based Employee Benefits which may include but not limited to Vanilla Stock Options, Restricted Stock Units, Roll Over Stocks, Phantom Equity Plan to its employee or director of an officer in India or branch of an overseas entity or a subsidiary in India of an overseas entity or of an Indian entity in which overseas entity has direct or indirect equity holding.
Any acquisition of shares or interest in an overseas entity by a resident individual in India qualifies as an overseas direct investment (‘ODI’) as per Foreign Exchange Management (Overseas Investment) Rules, 2022 (‘ODI Rules’). Such acquisition is subject to the overall ceiling of USD 250,000 per financial year (April to March) under the Liberalised Remittance Scheme (‘LRS’) prescribed by the RBI.
The ODI Rules under Schedule III permits the resident individual to acquire the shares or interest in an overseas entity under a scheme of Share Based Employee Benefits without any ceiling limits prescribed under the LRS or ODI Rules, if such an offer by the overseas entity under an ESOP is made on a uniform basis globally. Such acquisition should be reported to the Authorised Dealer-Bank in Form A2.
Conclusion
An issuance of Share Based Employee Benefits to an employee residing outside India qualifies as FDI in the books of the Indian company and requires compliances under NDI Rules. Similarly, acquisition of Share Based Employee Benefits by an employee residing in India qualifies as an ODI and requires compliances under LRS and ODI Rules prescribed by RBI.
[The authors are Executive Partner and Senior Associate, respectively, in Corporate and M&A practice at Lakshmikumaran & Sridharan Attorneys, Hyderabad]
