Recent RBI Circular Modifying Regulatory …

1 Recent RBI Circular Modifying Regulatory Requirements in connection with Grant of ESOPs/ Sweat Equity Shares to Non-residents 1. Background Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000 ( Regulations ) read with Foreign Direct Investment ( FDI ) Policy as updated from time to time used to govern the Regulatory and compliance aspects of Employee Stock Options ( ESOPs ) being issued by an Indian Company to its employees resident outside India ( Non-resident employees ). These Regulations provided that: (i) An Indian Company can issue shares under esop scheme , 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 drafted as per regulations issued under the SEBI Act, 1992 in case of listed Company or the relevant Companies Act provisions in case of an unlisted Company, as the case may be.

2 (ii) Face value of the shares to be allotted under the esop scheme to the Non-resident employees does not exceed 5 per cent of the paid up capital of the Company; and (iii) The Trust/ issuer Company is required to report the details (plain paper reporting) of grant of ESOPs to the Non-resident employees to the Regional Office concerned of the Reserve Bank of India ( RBI ), followed by filing of details in Form FC-GPR when shares are issued. Barring few exceptions involving countries like Pakistan and Bangladesh, etc., the extant Regulations read with FDI Policy required only reporting formalities but no prior approval in case of Companies pertaining to sectors in automatic route.

3 The Companies which pertained to sectors needing Foreign Investment Promotion Board ( FIPB ) approval were required to obtain prior approval under the extant Regulation. Recently, the RBI has issued a directive under A. P. (DIR Series) Circular No. 4 dated July 16, 2015 after amending the aforesaid Regulations last month. This amendment sought to modify the extant requirements to certain extent. We highlight here important aspects of this Circular that would help understand and comply with the amended provisions.. 2. Highlights of the amended Regulations As per Regulation 8, an Indian Company may issue ESOPs or Sweat equity shares to its employees/ directors or employees/ directors of its Holding Company or joint venture or wholly owned overseas subsidiary/ subsidiaries who are resident outside India, provided that: 1.

4 (i) The esop scheme has been drawn either in terms of regulations issued under the Securities Exchange Board of India Act, 1992 or the Companies (Share Capital and Debentures) Rules, 2014 notified by the Central Government under the Companies Act 2013, as the case may be;. (ii) ESOPs and Sweat equity shares issued to Non-resident employees / directors under the applicable rules/regulations are in compliance with the sectoral cap applicable to the said Company;. (iii) Issue of ESOPs or Sweat equity shares where foreign investment is under the approval route shall require prior approval of FIPB;. (iv) Issue of ESOPs or Sweat equity shares to a citizen of Bangladesh/ Pakistan shall require prior approval of FIPB; and (v) Companies furnish a return within 30 days of issue of ESOPs or Sweat equity shares in a prescribed format to the Regional Office concerned of the RBI under whose jurisdiction the registered office of the company operates.

5 3. Our broad observations There is no significant change in the spirit of the extant Regulations as prior approval is still required in case of issue of ESOPs and Sweat equity shares (i) where FDI to the issuer Company requires FIPB approval, or (ii) is proposed to the citizens of Bangladesh or Pakistan. The requirement to file an intimation of issue of ESOPs is restored. However, apart from plain paper reporting, now the issuer Company has to file a Report in the newly prescribed format within 30 days from the date of such issue. A major change seems to be the removal of the erstwhile overall ceiling of 5 per cent of the paid up capital of the Company in respect of issue of ESOPs to Non-resident employees.

6 The overall sectoral cap applicable to the company will now include the issue under ESOP or Sweat equity or both. This also means that a Company can issue ESOPs to non-resident Indian employees up to the relevant sectoral cap if does not have any other FDI holding. Ceiling being linked to sectoral cap has opened up huge possibilities for covering a large mass of Non-resident employees under esop scheme (s). However, this may not be true for Sweat equity shares as these have to be within the limits prescribed under the Companies Act, 2013. read with Rule 8 of Companies (Share Capital and Debenture) Rules, 2014 being 15% of paid-up equity capital for annual issue and 25% of paid-up equity capital for overall issue of Sweat equity shares.

7 Besides above, the relevant provisions on issue of ESOPs in the FDI Policy now stands integrated in the amended Regulation. 2.