Issuance of Overseas ESOPs: Global Rewards, Indian Regulations

The Foreign Exchange Management Act, 1999 and various rules/regulations issued thereunder, such as the Foreign Exchange Management (Overseas Investment) Rules, 2022 ("OI Rules"), the Foreign Exchange Management (Overseas Investment) Regulations, 2022 ("OI Regulations"), and the Foreign Exchange Management (Overseas Investment) Directions, 2022 ("OI Directions") (collectively the "OI Regime"), govern that ESOPs granted by offshore entities to Indian resident employees ("Indian Employees") at/issued with the Indian parent entity ("Indian Employer").

Offshore entities granting ESOPs:

The OI Rules permit grant of ESOPs by offshore entities to Indian employees, provided that:

1. 1Such individuals are employees or directors of the Indian office/ branch or subsidiary of such offshore entity, or an individual who is or has or will have vested funds direct or indirect equity interests.
2. 2The ESOPs are offered by the issuing offshore entity "globally on a uniform basis."

While there is no specific guidance from the Reserve Bank of India ("RBI") for the interpretation of "globally on a uniform basis," however, it appears to suggest that the underlying ESOP Plan should not be limited to a particular jurisdiction or available only to certain employees but should be offered globally and predominantly operated on a uniform basis.

Categorization of ESOP Investment:

The OI Rules provide that:

1. 1Indian Employees may require shares or similar equity interests of permissible offshore entities on a pari passu basis.
2. 2Overseas investment by Indian Employers should be less than 10% of the total equity capital of the listed (or unlisted) of the issuing entity, after acquisition of any control.

This is classified as Overseas Portfolio Investment ("OPI") and the OPI route also covers investments by Indian resident individuals in the issuing entity that are engaged in "financial service activity."

Investment Amounts and LRS Limits:

1. 1There is no cap on the annual donation amount that can be remitted by the Indian employee for acquisition of the ESOP Shares under the LRS Limits, and such remittances will be covered under Liberalised Remittance Scheme ("LRS") issued by the RBI. Currently, at USD 250,000 per financial year.
2. 2Any remittance above USD 250,000 is permitted, but each individual's limit for the concerned financial year will stand exhausted and each individual may not be able to make any other overseas investments (other than at the ESOP route) for that particular financial year.

The Role of a Personal Trust

To subscribe to the ESOP Shares on own exercise of the ESOPs, the Indian Employee can make use of the personal trust structure (trust) to hold the shares, which can make an account for each subscription directly to the issuing entity through any key securities:

• Ordinary banking clearances
• Funds held in an account maintained in accordance with the Foreign Exchange Management Act, 1999

Reporting for acquisition of ESOP Shares:

Reporting for acquisition of ESOP Shares:

1. 1The Indian Employee is required to file bi-annual reporting in Form OPI within 60 days from the end of each half-year period (i.e., 31st March or 30th September of a given financial year) in which the Indian Employee acquired the ESOP Shares under the Indian Employer's AD Bank.
2. 2The Indian Employee acquiring the ESOP Shares under the ESOP Plan continues to remain exempt from the requirement to make any separate filings.

Form OPI includes following details:

• ESOP investment amount
• Details of the ESOP Shares being acquired
• Number of shares (reporting the ESOP Shares)
• Details of the issuing Entity

There is no exemption from reporting for remittances exercised of the ESOPs under OI Regime at the RBI. Form OPI have to be filed by the Indian Employer for remittances exercise where no money has been remitted by the Indian Employee(s).

Failure to make the reporting:

1. 1In case of failure of reporting within the stipulated timeline would attract a late submission fee ("LCF") of USD 1 per delayed filing, where the filing is finally made within three (3) years from the due date.
2. 2In case if there is delay beyond three (3) years, a compounding application will need to be filed by the Indian Employee with the RBI to rectify such delay, whereupon RBI could impose a compounding penalty of INR 10,000 per delayed filing plus a penalty of up to INR 300,000 depending on the amount and nature of contravention involved.

Conclusion

The OI Regime provides a clear pathway for offshore ESOP issuances, but compliance is essential. Understanding eligibility, rules, payment rules and reporting obligations ensures smooth participation in global equity plans for Indian employees.