In today’s globalised arena, where the corporate sector is also widening its arms and becoming borderless, it has become the need of the corporate houses to not only cater the needs of their domestic employees but also extend benefits to the employees who are resident outside India, whether be it the employees of subsidiary or holding company. ESOPs and Sweat Equity have been recognised as the most effective form of rewarding employees, both domestically and globally.

The lawmakers have also kept pace with the requirements of dynamic business world, and have accordingly recognised and ruled out governing provisions for Employee Benefit Schemes, in relevant statutes, be it Companies Act, 2013, SEBI Regulations and now FEMA.

When it comes to participation of foreign employees in the Employee Stock Option Scheme, such a transaction attracts the applicability of the provisions of Foreign Exchange Management Act. The extant regulations stipulated that an Indian Company, issuing shares under ESOS to the employees overseas has to make sure that the face value of such shares does not exceed 5% of the paid-up capital of the Company. The Indian Company was casted with the responsibility to secure compliance with these conditions and the reporting requirements.

The Reserve Bank of India reviewed the same and came up with the Circular dated July 16, 2015, in which the Bank, in addition to the above said requirement, highlighted few more conditions/ pre-requisites which an Indian Company undertaking or which propose to make any issuance of Equity Shares under any Employee Stock Option Scheme or any such scheme, to the employees who are resident outside India, shall adhere to. The same have been outlined below:

• The Scheme, pursuant to which the shares are being issued to foreign employees, should be in compliance with the SEBI (Share Based Employee Benefit)Regulations, 2014 or SEBI (Issue of Sweat Equity) Regulations, 2002, as the case may be, and Section 62 (read with Rule 12 of Chapter IV) or Section 54 (read with Rule 8 of Chapter IV) of Companies Act, 2013, as the case may be;

The issue to non-resident employees/ directors should be in compliance with the sectoral cap applicable to the said company;

If a Company’s foreign investment is under approval route, then the issue of ESOS/ Sweat Equity shall require prior approval of Foreign Investment Promotion Board.

Even if the Company falls within the Automatic route, issuance of ESOS/ Sweat Equity to citizens of Bangladesh/Pakistan shall require prior approval of the Foreign Investment Promotion Board (FIPB) of Government of India.

A return in Form ESOP shall be furnished within 30 days from the date of issue of shares under ESOP Scheme, to the Regional Office of RBI, by the issuing company;

A declaration shall be given shall be given by the authorized representative of the issuing company, that all the aforesaid conditions have been complied with.