ESOP Under FEMA Regulations

Entry routes for investments in India Under the Foreign Direct Investments (FDI) Scheme

Investments can be made in shares, mandatorily and fully convertible debentures and mandatorily and fully convertible preference shares of an Indian company by non-residents through two routes:

• Automatic Route: Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment.
• Government Route: Under the Government Route, the foreign investor or the Indian company should obtain prior approval of the Government of India(Foreign Investment Promotion Board (FIPB), Department of Economic Affairs (DEA) Ministry of Finance or Department of Industrial Policy & Promotion, as the case may be) for the investment.

In case ESOPs are offered to employees working outside India, the FEMA provisions shall additionally apply. Applicable provisions of FEMA (Transfer or Issue of security to a person resident outside India) Regulations, 2000 (FDI Regulations) & Consolidated FDI Policy, 2015 issued from time to time are as under:

Definition under FDI Regulations: “2 (iif) “employees‟ stock option” means the option given to the directors, officers or employees of a company or of its holding company or joint venture or wholly-owned overseas subsidiary/subsidiaries, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price.”

Formerly, the regulations did not cover sweat equity shares and stock options to directors, employees, or officers of holding company. RBI vide Notification No. FEMA.344/2015 RB dated June 11, 2015, issued Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Fourth Amendment) Regulations, 2015, and permitted an Indian Company to issue shares under the Employee Stocks Options Scheme.

(xa) “Sweat Equity Shares” means such equity shares as issued by a company to its directors or employees at a discount or for consideration other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.”

Regulation 8 of FDI Regulations:

1 (1) An Indian company may issue “employees stock option” and/or “sweat equity shares” to its employees/directors or employees/directors of its holding company or joint venture or wholly-owned overseas subsidiary/subsidiaries who are resident outside India, provided that :

a. The scheme has been drawn either in terms of regulations issued under the Securities Exchange Board of India Act, 1992 or the Companies (Share Capital and Debentures) Rules, 2014 notified by the Central Government under the Companies Act 2013, as the case may be.

b. The employee’s stock option/sweat equity shares issued to non-resident employees/directors under the applicable rules/regulations are in compliance with the sectoral cap applicable to the said company.

c. Issue of employee stock option/sweat equity shares in a company where foreign investment is under the approval route shall require prior approval of the Foreign Investment Promotion Board (FIPB) of the Government of India.

d. Issue of employees stock option/sweat equity shares under the applicable rules/regulations to an employee/director who is a citizen of Bangladesh/Pakistan shall require prior approval of the Foreign Investment Promotion Board (FIPB) of the Government of India.

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