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Employees' Stock Option Scheme (ESOPs)

What is ESOP?

Employees’ stock option’ (ESOP) means an ESOP as defined under the Companies Act, 2013 and issued under the regulations issued by the Securities and Exchange Board of India (for listed entities).

Regulations/Master Directions Applicable:

  • Foreign Exchange Management Act, 1999 
  • Master Direction – Foreign Investment in India
  • Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 
  • Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017

Compliance:

An Indian company which issues employees’ stock option to persons resident outside India who are:

    •  its employees 
    •  directors or employees 
    •  directors of its holding company / joint venture / wholly owned overseas subsidiary / subsidiaries 

shall file Form-ESOP, within 30 days from the date of issue of employees’ stock option at the FIRMS portal of RBI.

Points to be noted:

  1. The face value of the shares to be allotted under the scheme to the non-resident employees should not exceed 5 per cent of the paid-up capital of the issuing company. 
  2. Shares under ESOPs can be issued directly or through a Trust subject to the condition that the scheme has been drawn in terms of the relevant regulations issued by the SEBI.

Conditions for issue of ESOP and Sweat Equity Shares as per Master Direction – Foreign Investment in India:

  1.  The ESOP is drawn either in terms of regulations issued under the SEBI Act, 1992 or the Companies (Share Capital and Debentures) Rules, 2014 
  2.  The “employee’s stock option”/ “sweat equity shares” are in compliance with the sectoral cap applicable to the said company;
  3.  Issue of “employee’s stock option”/ “sweat equity shares” in a company where investment by a person resident outside India is under the approval route requires prior Government approval;
  4.  Issue of “employee’s stock option”/ “sweat equity shares” to a citizen of Bangladesh/ Pakistan requires prior Government approval.

An individual who is a person resident outside India exercising an option which was issued when he/ she was a person resident in India shall hold the equity instruments so acquired on exercising the option on a non-repatriation basis.

Form ESOP Filing Process:

FIRMS is an online portal for reporting of foreign investment into India. It facilitates filing of Single Master Form (SMF) which provides for the reporting of 9 forms for foreign investment viz., FC-GPR, FC-TRS, LLP-I, LLP-II, CN, DRR, ESOP, DI and InVi. For filing of Form ESOP, following steps need to be taken:

    1. Business User Registration (BU) – A BU is an applicant who reports the transaction in Single Master Form in FIRMS. A BU can use his login credentials only for the entity that has authorized him/her to report the transactions 
    2. e-KYC – Every business user has to be e-KYC verified before any reporting can be made in the Single Master Form 
    3. Know Your Customer (KYC) – For the remittance received from the non-resident investor, the KYC of the same is to be provided along with the forms in SMF as and where applicable and indicated. 
    4. Logging into SMF at FIRMS Portal – Login into SMF and reach your workspace and select Form ESOP and click on Add New Return. The user will be taken to form ESOP.
    5. Fill in the common Investment details, ESOP details, shareholding pattern and click on save and submit for submitting the form.

List of documents to be submitted along with Form ESOP:

  1. Relevant extracts of the ESOP scheme 
  2. Declaration as in the format specified in the FIRMS User Manual 
  3. CS certificate as specified in the FIRMS User Manual
  4. Letter of Grant/ Offer – Name of the employee in the letter of grant vis a vis name mentioned in the CS certificate. No of shares and exercise price should also be mentioned.

Late Submission Fee (LSF) Matrix for Reporting Delays, wherever applicable:

Notes: 

  1. “n” is the number of years of delay in submission rounded-upwards to the nearest month and expressed up to 2 decimal points. 
  2. “A” is the amount involved in the delayed reporting.
  3. LSF amount is per return.
  4. Maximum LSF amount will be limited to 100 per cent of ‘A’ and will be rounded upwards to the nearest hundred.
  5. In case a person responsible for any submission or filing under the provisions of FEMA, neither makes such submission/filing within the specified time nor makes such submission/filing along with LSF, such person shall be liable for penal action under the provisions of FEMA, 1999.

Disclaimer: The information contained in this Article is intended solely for personal non-commercial use of the user who accepts full responsibility of its use. The information in the article is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. We make no representation or warranty of any kind, express or implied regarding the accuracy, adequacy, reliability or completeness of any information on our page/article. 

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