In this blog post, Saurodeep Dutta, a student of University of Calcutta, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes about the special reliefs given for the acquisition of shares of software company employees of Joint Venture/Wholly Owned Subsidiaries abroad.

Introduction

Good Employees in the current era often are often hard to find, and harder to retain. The cause of this has been the ever growing opportunity that a professional has. In many cases, employers attempt to keep their prized employees by a method of incentivising, so that they are not only recompensed with salaries, but they get further incentives from the employers, so that they are less liable to be “poached” by other companies coveting their skill set. This has been especially felt by the software industries, with many high profile employees leaving and joining competitors, leaving to make an entirely new firm on their own.

A popular method of incentivising is Employee Stock acquisitions of the company, with the employee gaining methods of acquiring shares from the companies they are part of. This has led to many of the top tech company executives turning into millionaires by receiving employee stock options from the companies they work for.[1]

Employee Stock Option Plans in India were once unheard of, but now it has received immense backing and is not uncommon. The software industry has adopted this readily, being one of the earliest industries being affected by the brain-drain issue.

Guidelines related to Employee Stock Options (ESO) in foreign countries

Foreign Security is regulated by the Reserve Bank of India. The RBI controls the sale, purchase, holding of any foreign security by an Indian citizen. In a case of its approval, the movements of the fund from/to India required for it is also approved. In most cases, repatriation to India is required, unless there is a specific exception. In all these cases, the permission of the Reserve Bank of India is an extremely important part. The award cannot progress beyond the permission of the Reserve Bank of India. The RBI entertains the applications of residents of foreign companies, and their joint ventures and wholly-owned subsidiaries in which the foreign company has not less than a 51% stake.

Special concessions to software companies[2]

To facilitate the promotion of the Indian industries that are related to knowledge, the government has attempted to ensure that the issue of stocks following the ADR/GDR route in such industries is smoother. The permission that is ordinarily required from the RBI in these cases has been dispensed with, and the companies engaged in this business can issue such ESOs without any requirement for the compulsory RBI permission. Only the industries falling under software and information technology has been allowed this opportunity.

Eligibility condition

There are however eligibility criteria that must be followed for the company to qualify for this unique exception. The most obvious is the fact that the company has to be engaged in the field of software and information technology. The company is also required to have at least 80% of its revenues come exclusively from this field.

Other conditions

This facility is available to all resident and non-resident employees of the company, including Directors. This is not available to Promoter Directors and their family members who are employed by the company. The company may also not issue more than 10 % of its paid up capital. The Stock Options must not be provided at a discount of more than 10% of its market value. The ADR/GDR acquired during such transfer is freely transferable, but the stocks itself, are not. These ADR/GDRs will qualify for concession under Section 115AC of the Income Tax Act. The sale of these securities, as mentioned above, must be repatriated back to India unless RBI permission has been taken to ensure they have kept abroad.

Indian employee ESO in Indian Parent’s Company, JV, WOS

In a similar manner to the above form of stock options, an Indian employee also has the right to gain the stocks of the JV/WOS of the Indian parent software company, which has been set up abroad. Remittance for such options will not be more than $ 10,000 per employee for a company each five years. Another condition for the implementation of the said stock option is that the acquiring of stock options by the Indian employee must not reduce the overall shareholding of the company in the foreign company, below what was present earlier.

Footnotes:

[1] Google CEO SundarPichai had been awarded stocks in the Company worth $100 million.

http://money.cnn.com/2016/02/09/investing/sundar-pichai-google-stock/

[2] Investment Banking: An Odyssey in High Finance, Pratap G Subramaniam, Tata McGraw-Hill Publishing Co. Page 367-368.