Wednesday, 19 August 2015


The Reserve bank of India (RBI) has recently amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 and has come up with the Fourth Amendment Regulations, 2015 on June 11, 2015 governing the issue of shares under an Employee Stock Option Scheme (ESOP) and/or sweat equity shares to a person resident outside India. Further, RBI has also issued directions in this regard via circular dated 16 July 2015 (Amended Regulations).

The erstwhile provisions before the Amended Regulations on the subject matter were as follows:

1.     An Indian company can issue shares under Employees’ Stock Option (ESOP) Scheme, by whatever name called, to its employees or employees of its joint venture or wholly owned overseas subsidiary/subsidiaries who are resident outside India, directly or through a trust, provided that the scheme has been drawn in terms of regulations issued under the SEBI Act, 1992;
2.  Face value of the shares to be allotted under the scheme to non-resident employees does not exceed 5 per cent of the paid up capital of the issuing company; and
3.  The trust or Indian company has to ensure compliance with the above conditions and comply with the reporting requirement.

Key highlights of the Amended Regulations:

1.    The definitions of sweat equity and ESOP have been added;
2.   Issuance of sweat equity shares has been allowed with the amended regulations;
3. Issuance of shares/options to non-resident directors of its joint ventures or wholly owned subsidiary/subsidiaries under the applicable rules/regulations are in compliance with the sectoral cap applicable to the said company;
4.  Issue of ESOPs or sweat equity shares where foreign investment is under the approval route shall require prior approval of FIPB;
5.  Issue of ESOPs or sweat equity shares to a citizen of Bangladesh/ Pakistan shall require prior approval of FIPB;
6.  Overall ceiling of 5 per cent of the paid up capital of the Company in respect of issue of ESOPs to non-resident employees has been done away with;
7.  The issuer Company has to file a report in the newly prescribed format FORM ESOP within 30 days from the date of such issue; and
8. Additional compliance requirement of obtaining from a merchant banker/chartered accountant a certificate for valuation of shares.

The aforesaid Amended Regulations have been introduced to align the provisions of the Companies Act, 2013, FEMA and the SEBI on the subject matter.

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