In today’s globalized business environment, companies are no longer confined to their domestic markets. Many have expanded their reach by establishing foreign subsidiaries or flipping ownership outside their home country. Similarly, foreign companies are setting up subsidiaries in India to tap into local talent and market opportunities. When a company owns more than 51% of the stock in another company, it becomes the parent company, and the latter is its subsidiary.
Given that the value consolidation happens at the parent company level, which is often located outside India, it is common for stock options to be granted from the holding company to the employees of its Indian subsidiaries under an approved global stock option plan. These foreign stock options are subject to specific regulations in India due to the cross-border nature of these transactions, which involve the flow of foreign reserves.
While domestic stock options are relatively well-understood, the nuances of foreign stock options are less familiar to many employees. This blog aims to demystify foreign stock options by addressing some common questions and providing clear, concise answers to help employees navigate this complex area.
Frequently asked Questions (FAQs)
What are the key aspects to look out for in a grant letter received from a foreign holding entity?
When evaluating a stock option grant, employees should carefully review the number of options granted, the eligibility criteria for vesting and exercising the options, and the payment options available. Vesting may be time-based, performance-based, or a combination of both. Many foreign companies offer cashless exercise options, simplifying the process by avoiding foreign exchange issues.
Do foreign stock options work differently from domestic ESOPs in India?
While the underlying principles of ESOPs are similar globally, specific aspects such as vesting and exercise conditions can vary. In jurisdictions like Singapore and the US, companies must have a stock option plan and pool from which grants are made. Employees need to meet the vesting conditions specified in the grant letter to exercise their options and purchase company shares.
Is the grant letter based on laws applicable to the Indian subsidiary or the foreign holding entity?
Indian laws require uniform grants to all subsidiaries globally. The holding company sets the terms of the grant, meaning any changes in the holding company’s structure or stock price will affect all employees, regardless of their subsidiary’s location.
Who administers the stock options—the Indian subsidiary or the foreign parent company?
The administration depends on the stock option plan. Some plans allow subsidiaries to manage the options, offering direct control over the employees.
Do employees receive shares of the parent or subsidiary company upon exercising options?
Employees receive shares of the foreign holding entity. As shareholders, they will be part of the holding company’s cap table and governed by its articles, constitution, or bylaws.
What are the employee's rights as a new shareholder in the foreign holding entity?
Shareholders enjoy rights under the laws of the home country, as specified in the company’s articles, constitution, or bylaws.
What are the disclosure requirements for income from foreign options?
Employees must disclose foreign income under the Foreign Asset schedule in their Indian Income Tax Return.
What additional concerns come with holding foreign options compared to resident company options?
Foreign options are more susceptible to global market volatility, affecting share prices and potential returns.
What are the advantages and disadvantages of cashless exercise for foreign stock options?
Cashless exercise avoids foreign exchange outflows and simplifies administration, as no prior permission for payments is required.
What happens to the options if the subsidiary employee resigns or is terminated?
Upon resignation or termination without cause, vested options can be exercised within a set period, while unvested options lapse. In case of termination for cause, all options typically lapse.
Can shares be transferred post-exercise of options?
Shares can be transferred between resident and non-resident investors, with compliance to local regulations and notification to the foreign entity.
In what jurisdiction is the tax payable?
Income from foreign options is generally taxed in both the country of income origin and the taxpayer’s residence. Taxability in India depends on where the income is earned, and double tax avoidance treaties may apply.
Should the employee file any report to the RBI on foreign shares held?
No, the Indian subsidiary is responsible for filing an annual report on foreign holdings and any changes.
Navigating the complexities of foreign stock options can seem daunting, but understanding the key aspects can empower employees to make informed decisions. As global business operations become increasingly common, the opportunities for Indian subsidiary employees to benefit from foreign stock options grow. By comprehending the nuances of grant letters, vesting conditions, exercise methods, and tax implications, employees can maximize the potential of these financial instruments. With a clear grasp of the regulations and the strategic advantages offered by foreign stock options, employees can leverage these benefits to enhance their financial well-being and align their interests with the global success of their parent company.
