The Dollar Option (Economic Times - Corporate Dossier issue dated 10-9-99 )

Multinationals have shown the way. Indian employees of Procter & Gamble, Eastman Kodak, Bank of Americaand a few other select companies hold dollar ESOPs . So why not us, says Infoscions. Remember, Infosys is listed abroad. Of course says RBI. So employees of Indian Software companies can now acquiredollar-denominated stocks under ADR/GDR linked stock options to their employees here.
According to the guidlines, eligible listed and unlisted software companies whose income from software activities is not less than 80% of turnover can issue options.And these options can be given to non-resident and resident permanent employess (including Indian and overseas working directors). Promoters and their relatives are not eligible. The guidlines also say that such stock options shall not exceed 10% of the companies equity capital.

The stock options can carry a maximum discount of 10% to the market price of the ADR/GDR as on the date of grant of the options. Eligible employees can remit upto $50,000 in a block of 5 yeras for excercising the options and acquiring ADRs/GDRs.

Structuring of such stock options, when given to employees in more than one country is a complex exercise. Apart from the Indian regulatory issues, the company will have to look at regulatory issues in the country in which the securities are listed/issued. For eg. under US regulations, stock options can be statutory or non-statutory.. A statutory stock option has significant tax benefits in that the taxability is deferred till the sale of the stock recieved on exercise, as ordinary income and enjoy capital gains benefit hereafter.

Or,if a company is issuing global options, it has to take into account labour laws of the country in which the employee is based. For instance in some countries like Germany or Netherlands, employees may deem options as employment remuneration and that may become a recurring obligation for the company. Or even privacy laws say, japan or Germany: calling for employment details of its people working in these countries could tread on the privacy laws there.

In case of software companies, many employees are regularly deputed deputed abroad for various periods of time. Issues on taxability would arise when an Indian resident employee having ADR/GDR linked stock options while in India. Similarly an employee who has been granted such options while he was stationed outside India, may exercise the options after having returned to India, although a substantial part of his employment during the currency of the option was exercised outside India.

The most irksome detail while issuing global options to Indian employees is tax deduction at source when the employee exercises the option. The company has to incorporate some method in the plan document itself to deduct TDS.

The guidlines for issue of ADR/GDR linked stock options for employees of Indian softwarecompanies is a step in the right direction. These are various issues that have to addressed while structuring such stock options. As ESOPs become popular, it is imperitive that RBI/GOI permits even non-software companies to issues ADR/GDR linked stock options fpr its employees.