Stock Options to Foreign Employees

It is rightly said that inculcating a feeling among the Employees that management is not just concerned about their value addition to the organization but is very well concerned in accretion of their personal wealth, would not just create a sense of belongingness among Employees but would enhance their overall productivity.

Ms. Mohini Varshney
Assistant Vice President
With the emergence of concept of border less world, enhanced financial integration, global business presence and easy mobility of workforce, balancing sustainable growth and a pool of talent thereby ensuring same or better footing to its Employees what it counterparts are offering (whether in India or abroad) has become critical. Therefore, to address the concerns of Brain drain and Organization’s growth, there is a need to contemplate new incentive plans that align the need of both Employees (domestic and global) and the Organization for their mutual growth and advancement.
Appreciating the necessity of framing incentive plans to ensure survival in the dynamic global business environment, even the lawmakers have, time to time, chalked down or altered the provisions governing the entire gamut of stock options.

Employees covered under the ambit of Stock Options

Now the pertinent question while framing strategies for granting Stock Options is:

·     What all Employees can be covered under the ambit of Stock Option Plans framed by the Indian Companies?

To deal with this concern and to frame a comprehensive view on the eligible Employees a collective reading of all the applicable statues is required to be made to understand the framework of Company, its Wholly Owned Subsidiary, and its Holding and Associates Companies.

As per the Indian Regulatory regime, following Employees are broadly considered eligible for grant of Stock Options:
Legal regime governing the entire gamut of Stock Options
Though varied statues offer varied situations for restructuring Employee Welfare Plans that needs to be dealt with cautiously to ensure futility of the Plan. The important provisions that would have a direct bearing on the formation of Employee Welfare Plans are outlined as follows:
v  The lawmakers have very well recognized the importance of Stock Optionsin the Corporate world as a tool to ensure its long term growththat can be very well comprehendedfrom the provisions of the New Companies Act.

As per the New Companies Act an Indian Company is allowed to grant Stock Options to:
ü  Permanent employees of the company who have been working in India or outside India; or
ü  Directors of the company, other than promoter and independent directors;
ü  Permanent Employees of a subsidiary, in India or outside India, or of a holding company of the company or of an associate company 

v  The Capital Market regulator, SEBI vide its specific Guidelines on ESOS & ESPS governs the framework of Employee Welfare Plans in Indian Listed Companies to:
ü  Permanent employees of the Company working in India or out of India;

ü  Directors of the Company, excluding Promoters and independent directors; or
ü  Permanent employee of a subsidiary, in India or out of India, or of a holding company of the company.

v  One of the most important aspects that have a direct bearing on the lucrativeness of any Employee Welfare Plans is the taxability aspect of Stock Options.

ü  As per the provisions of Income Tax Act, 1961:
Any benefit flowing from employer to its employees whether in India or Outside India, directly or indirectly,will be considered as a perquisite. Accordingly, any issuance/transfer of shares to the employees of branch office or wholly owned subsidiary / holding company outside India, at a rate less than the value of the company / market rate as on the date of exercise, will be taxed as income in the hands of the employees.

ü  With regard to taxation of the Foreign Employees who frequently visit India, any income arises shall be taxed proportionately, i.e income that arises during his tenure in India shall be taxed as per the provisions of the Income Tax Act, 1961.

ü  With regard to other Foreign Employees who have never visited India but holding shares of Indian Company, taxation aspect as prescribed under the DOUBLE TAXATION AVOIDANCE AGREEMENT between India and the respective country in which the said foreign employee resides, need to be taken into account.
v  Issuance of Stock Options/Shares by Indian Company to the employees of its WOS / Holding Company located outside India, would also attract the provisions of Foreign Exchange Management Act, 1999:
ü  When the shares are being either transferred from residents to non-residents or a fresh allotment will be made to non-residents (Foreign employees), the provisions of FEMA Act, 1999 stand attracted, for transfer, allotment, money remittance and valuation aspects of the transaction. Stock Options can be issued to Foreign Employees provided that the face value of shares to be allotted under the scheme to the non-resident employees does not exceed 5% of the paid-up capital of the issuing company.
ü  The allotment/ transfer of shares to a non-resident shall not be made at a price which is less than the price at which the preferential allotment of shares can be made under the SEBI (ICDR) Regulations, 2009.
The said SEBI Guidelines says that the equity shares shall be allotted at a price not less than higher of the following:
“Average weekly high and low closing price over a trailing six months period, or a trailing two week period, from the relevant date of the transaction.”

 Leveraging the thought of rewarding Dazzling Employeesby sharing with them ownership platform, grooming their overall personality and creating a sense of belongingness among them, at the right time will not only open avenues for the long term growth of the Organization but will help in strengthening unity and team spirit among the Employees.
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