India Inc more than the current years has propelled and nurtured a robust begin-up eco-technique. With innovation at the core, numerous begin-ups have accomplished notable results, thereby fueling the all round financial development.
It is, nevertheless, incumbent on these begin-ups to attract and retain the ideal talent in the marketplace, notwithstanding their restricted sources. Employee Stock Option Plans (ESOPs) can play a crucial function right here, as a component of the compensation approach. While ESOPs have been conventionally made use of as a tool to incentivise lengthy-tenured senior management, current trends indicate that ESOPs are actively deployed as a hiring approach to attract talent. It is commonly seen that numerous begin-ups are incentivising workers early across various levels, as a component of their development, reward, and retention approach.
Employee motivation and producing a sense of ownership is important in a begin-up culture. ESOPs also serve as a retention-cum-money conservation tool thinking about that spend-outs beneath ESOPs commonly take place immediately after 3 to 4 years from the date of grant.
The modus-operandi of ESOPs largely remains the exact same across seasoned providers and begin-ups. However, workers in begin-ups commonly leverage on an early stage access to ESOP, thereby aligning their gains to the company’s development. On completion of vesting and workout, workers are allotted shares of the organization which can be monetised when the organization announces a liquidity occasion such as buyback or money acquisition or an IPO (Initial Public Offering). Considering that most begin-ups realize a decent valuation more than a period, the money spend-out on most occasions could outcome in sizeable earnings for the workers, thereby supplying them desirable monetary windfalls.
From employer viewpoint, begin-ups registered as private restricted providers will have to adhere to the suggestions prescribed beneath the Companies Act, 2013 study with the Companies (Share Capital and Debentures), Rules. These Rules outline the ambit and scope of ESOPs in so far as private restricted providers are concerned and it is crucial that these provisions are adhered to. For instance, the Rules provide that only specific category of workers and Directors of Companies can be remunerated beneath ESOPs. It could be noted that begin-ups registered with the Department of Industrial Policy and Promotion (DIPP) have been granted specific benefits in terms of the employee coverage beneath ESOPs.
From employees’ viewpoint, ESOPs are taxed at two stages in their hands:
# At the time of workout of ESOPs – as a perquisite
# At the time of sale of shares – as capital gains
On workout, the distinction amongst Fair Market Value (FMV) of the shares on the date of workout [as determined by a Category I Merchant Banker registered with the Securities and Exchange Board of India (SEBI)] and the Exercise Price is taxed as perquisite.
The employer will have to withhold tax on such perquisite and report the exact same although filing their quarterly returns (Form 24Q). The perquisite as properly as tax deducted on such perquisite must reflect in the employee’s Form 16 / Form 12BA. It could be noted that successful FY 2020-21, an employee getting ESOPs from an eligible begin-up require not spend tax in the year of working out the solution. The TDS on the perquisite stands deferred to earlier of the following events:
# Expiry of 5 years from the year of allotment of ESOPs
# Date of sale of the ESOPs by the employee
# Date of termination of employment.
On sale, the distinction amongst the sale cost and FMV on the workout is taxed as capital gains. Taxability as quick-term or lengthy-term depends upon the period of holding from date of workout to the date of sale.
To summarise, possessing ESOPs as a component of recruitment and retention approach gives a competitive edge and aids produce an energised and motivated workforce. It inculcates a sense of pride in the workers by means of a feeling of ownership and partnership in the company’s development trajectory along with their personal wealth creation. It is crucial that the employer be totally conscious of the relevant regulatory provisions prior to supplying ESOPs as also the workers must be conscious of the tax consequences arising on workout and monetisation of securities beneath ESOPs.
(By Parizad Sirwalla, Partner and Head, Global Mobility Services – Tax, KPMG in India)