Sagar Madan

Introduction to ESOPs and Their Global Expansion

In the context of today's global workforce, Indian companies are increasingly offering Employee Stock Option Plans (ESOPs) to talent located outside India. These cross-border benefits serve to improve employee retention and align interests but involve complex legal and regulatory compliance. Understanding the legal framework, including the Companies Act, 2013, and FEMA guidelines, is essential for issuing ESOPs to non-residents.

Definitions and Key Terms

• Employee Stock Option (ESOP): Defined under the Companies Act, 2013, and SEBI regulations, it grants employees, directors, or officers the right to purchase or subscribe to shares at a predetermined future price, typically under an Employee Stock Option Scheme (ESOS).
• Employees' Stock Option: An option given to eligible employees or directors of a company or its subsidiaries, allowing them to buy shares at a future date at a fixed price, as per the terms of the ESOP scheme.
• NRI (Non-Resident Indian): An individual who resides outside India but is an Indian citizen.
• OCI (Overseas Citizen of India): An individual residing outside India registered as an OCI Cardholder under the Citizenship Act, 1955.

Resident and Non-Resident Definitions

Person Resident in India: Someone residing in India for more than 182 days in a financial year, including Indian citizens, bodies corporate registered in India, and Indian-controlled offices or branches abroad.

Person Resident Outside India: An individual or entity not residing in India.

Stages of Granting and Exercising ESOPs:

• Granting: The company offers stock options to eligible employees via a formal grant letter, determined by the Board.
• Acceptance: Employees accept the options by submitting a completed acceptance form before the deadline.
• Vesting: Options vest over time as per the ESOP scheme's terms, making them exercisable.
• Exercise: Employees exercise vested options to acquire shares within the specified exercise period.

Legal Framework Under the Companies Act, 2013

The Companies Act, 2013, along with Rules under the Companies (Share Capital and Debentures) Rules, 2014, governs ESOP issuance. Companies with share capital can issue shares under ESOP schemes, subject to passing a special resolution and compliance with procedural requirements.

Strategic Counsel for Today’s Financial World

Eligible employees include:

• Permanent employees of the company or its subsidiaries, whether in India or abroad.
• Directors of the company or its subsidiaries, excluding independent directors.

Ineligible employees include:

• Promoters or promoter group members.
• Directors holding more than 10% of the company's equity, directly or indirectly.

Start-ups can issue ESOPs to promoter group employees or directors holding over 10% for up to 10 years from incorporation, with specific exemptions.

Procedural and Legal Steps for Issuance of ESOPs

1. Identify eligible employees.
2. Ensure sufficient authorized share capital.
3. Determine the issue price.
4. Draft the ESOP scheme with detailed terms.
5. Board approval of the scheme.
6. Shareholders' approval via a special resolution.
7. Grant options through a formal letter.
8. File intimation with RBI as per FEMA guidelines.
9. Maintain proper records of ESOPs.
10. When options are exercised, hold a Board meeting for share allotment.
11. File Form PAS-3 with the Registrar of Companies (RoC).
12. Update the register of members and issue share certificates.
13. Pay applicable stamp duty.

Disclosure and Reporting Requirements

Companies must disclose ESOP details in the Board's report, financial statements, and explanatory notes. Required disclosures include:

• Number of options granted, exercised, or lapsed.
• Exercise price and total options in force.
• Expenses related to ESOPs.
• Details of vested and unvested options.

Restrictions on ESOP Grants

• Options are non-transferable and cannot be pledged or encumbered.
• Only the employee to whom options are granted can exercise them.
• Options vest upon permanent incapacity.
• Options expire upon resignation or termination if unvested.

Legal Framework Under FEMA for Cross-Border ESOPs

FEMA, 1999, regulates investments from foreign employees, treating them as Foreign Direct Investment (FDI). Issuance of ESOPs to non-residents must comply with sectoral caps, investment limits, and pricing guidelines.

Issuance Conditions to Non-Residents

• The scheme must follow regulations under SEBI or the Companies Act, 2013.
• Issue must comply with sectoral caps.
• Expenses related to ESOPs.
• For approval route investments, prior RBI approval is mandatory.
• Issue to citizens of Bangladesh or Pakistan requires prior government approval.
• Shares acquired by non-residents must be held on a non-repatriation basis if issued when they were residents.

Approval and Reporting for Non-Resident ESOPs

• For approval route investments, RBI approval is required before grant.
• Automatic route does not require prior approval.
• Companies must file Form FC-GPR within 30 days of issuing shares to non-residents.
• Form ESOP must be filed with RBI via Authorized Dealer Bank within 30 days of issuance.

Conclusion

Issuing ESOPs to non-resident employees enables Indian companies to attract global talent. However, compliance with the Companies Act, 2013, and FEMA is crucial. This includes adhering to sectoral caps, approval processes, reporting, and disclosure requirements. Proper understanding and management of these regulations ensure successful and compliant cross-border ESOP schemes.