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RBI Liberalizes Grant of ESOP by Foreign Companies & Defines Norms for Repurchase
by Companies
By a recent
Notification1 dated April 5, 2006 addressed to all banks authorized to deal in foreign exchange, the Reserve Bank of India
("RBI") has rationalized the norms for issuance of shares of a foreign company under an Employee Stock Option
("ESOP") Scheme, and announced norms for repurchase through the automatic route of such shares from the employees. These changes pertain to Regulation 22 of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security)(Amendment) Regulation,
20042 (“Regulation”).
Issue of shares by Trust, SPV or step down subsidiary:
Under
the Regulation 22 (2), Authorised Dealer Banks were authorised to
allow remittances by Indian resident individuals without any
monetary limit to the foreign company for acquiring shares offered
under an ESOP Scheme by such foreign company, provided the
resident individual was an employee of the foreign company’s
branch or liaison office in India or an employee or director of an
Indian company, which was the subsidiary of the foreign company or
in which the foreign company held at least a 51% stake. It
is now proposed to permit remittance for acquiring shares under
ESOP Schemes, irrespective of the method of the operationalisation
of the scheme. Now therefore, Authorised Dealer Banks are
authorized to allow remittance for acquiring shares under an ESOP
Scheme, where the shares under the scheme are offered directly by
the issuing company or indirectly through a trust / Special
Purpose Vehicle ("SPV") / step down subsidiary,
provided (i) the company issuing the shares effectively,
directly or indirectly, holds in the Indian company, whose
employees / directors are being offered shares, at least 51% of
its equity; (ii) the shares under the ESOP Scheme are offered by
the issuing company globally on uniform basis, and (iii) an
Annual Return is submitted by the Indian company to the
Reserve Bank through the Authorised Dealer Banks giving details of
remittances / beneficiaries / etc., in the prescribed format.
Implications:
Now foreign companies will not have to wait to take clearance from
the RBI when granting ESOPs through a trust or SPV or by their
step down subsidiary, provided the conditions mentioned above are
satisfied.
However,
the companies are now required to file a report which is an
additional compliance requirement.
Repurchase
of shares
It
is further proposed to grant General Permission to foreign
companies to repurchase the shares issued to residents in India
under any ESOP Scheme provided the following conditions are
satisfied: (i) the shares should have been issued in accordance
with the Rules / Regulations framed under Foreign Exchange
Management Act, 1999 (ii) the shares should be repurchased
in terms of the initial offer document and, (iii) an Annual Return
in the prescribed form should be submitted through the Authorised
Dealer Banks, giving details of remittances, beneficiaries, etc.
Implications:
The above rationalization seems to be a retrogressive step since
such permission was already there under sub regulation 4 of
Regulation 22 of 2004. Now, by this recent Notification, the
RBI has imposed certain conditions for repurchase through the
automatic route. In particular, the condition that the repurchase
should be in terms of the initial offer document takes away the
ability of a private company to repurchase the shares if the
employee leaves employment. This can prove to be a substantial
hurdle for private companies to liberally give stock options as a
retention strategy.
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You
can direct your queries or comments to the authors
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Source:
RBI/2005-06/353
A.P. (DIR Series) Circular No. 30 April 05, 2006 http://rbi.org.in/scripts/NotificationUser.aspx?Id=2817&Mode=0
as viewed on April 7, 2006
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