Employee Stock Option Plans (ESOPs) for Start Ups

An Employee Stock Option Plan (ESOP) is an employee benefit that intends to give employees a share in the ownership of a company. The concept is more prevalent in start-ups, where the initial team works hard to create an intangible asset of high value in the long term, while agreeing to take relatively smaller remuneration packages in the first few years. In such cases, employee stock options become a good way to build ownership, and link employee compensation to the high value of the company or its product, which the business plans to achieve in a few years.

Contents

Definition & Validity of ESOPs in India

Eligible Employees

Important Terms used in ESOPs

Process for Implementing an ESOP Scheme

Compliance related to ESOPs

Valuation of ESOPs

Taxation of ESOPs for Employees

Definition & Validity of ESOPs in India

ESOPs can be issued by private limited companies, unlisted public companies, as well as listed companies.

As per Section 2(37) of the Companies Act, 2013, employees' stock option means the option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a predetermined price.

Further, Section 62(1)(b) provides that a company may, subject to compliance with conditions as prescribed under the Rules (in case of an unlisted company) and SEBI Regulations (in case of listed companies), offer shares to the employees under a scheme of employees' stock option.

Thus, an ESOP is an option or a right offered by a company to its employees to purchase its shares at a pre-determined price on a future date or event. Such event may be a specific date or achieving a certain milestone in terms of valuation or entry of a new investor.

Eligible Employees

An employee means a permanent employee of the company who has been working in India or outside India, or a director of the company, whether a whole time director or not but excluding an independent director.

Promoters and Founders of start-ups may not be eligible for ESOPs if they fall under the following restriction in the definition of employees eligible for ESOPs, as per the provisions of the Companies Act, 2013 read with the Companies (Share Capital and Debentures) Rules, 2014:

(i) an employee who is a promoter or a person belonging to the promoter group; or

(ii) a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the company.

However, the Ministry of Corporate Affairs (MCA) vide Notification dated 19-Jul-2016 issued the Companies (Share Capital and Debentures) Third Amendment Rules, 2016 by which promoters and Directors of start-ups holding more than 10% of the shares were permitted to be issued ESOPs within the first 5 years from the date of incorporation. To be eligible for such exception, the company has to be an eligible and registered start-up under the DPIIT.

Important Compliance Before 30th Sep 2020

1. GST Rectifications for FY 2019-20

a) Reconcile and match all your sales for FY 2019-20 with sales reported in GSTR-3B and GSTR-1 for the year. In case of any errors, the GST Return for September 2020 is the last opportunity to pass rectification entries relating to the previous year in the returns as amendment.

b) Reconcile GSTR-2A with Input Credit Register on the basis of which ITC has been claimed in each month's GSTR-3B for FY 2019-20. Bifurcate differences into ITC reflecting in GSTR-2A but not availed, and ITC availed but not reflecting in GSTR-2A. Entries in the former category may be availed (if eligible) in the GSTR-3B of August/September. Errors falling in the latter category may require follow up with the vendor to show it in their GSTR-1 correctly to your credit, or reversal with interest liability @ 24% p.a., as the case may be.

c) GST Debit Notes or GST Credit Notes relating to your supplies for FY 2019-20 may be issued latest up to 30th September 2020.

d) Any ITC apportioned between exempt supplies and taxable supplies on provisional basis monthly, has to be finalized annually latest by the period of September.

e) Check if all expenses/purchases (being input goods or services) on which ITC has been availed, have been paid within 180 days. If not, the ITC on them may have to be reversed with interest payment. In case there is no reason to withhold such amounts as due on 31.03.2020, pay them off to avoid such reversals.

e) Such changes are allowed up to the due date of filing GST returns for September only. In case September GSTR-3B or GSTR-1 are delayed, such changes may not be allowed.

2. GSTR-9 & GSTR-9C for FY 2018-19

a) GSTR-9C (Reconciliation Statement; also called GST Audit) is due to be filed by 30th Sep for every registered person having aggregate turnover as per GST of Rs. 5 crore or more for FY 2018-19.

b) GSTR-9 (Annual Return) for FY 2018-19 for all other registered persons with turnover less than Rs. 5 crore to be filed by 30th Sep.

Extension of AGM Due Date by 3 Months

The Ministry of Corporate Affairs (MCA) directed all Registrar of Companies of various states on the 8th of September, 2020, to accord approval for a 3 month extension in date for conducting the Annual General Meeting for the year ended on 31st March, 2020.

Thus, the due date for conducting the AGM has now been extended by 3 months from the erstwhile 30th September, 2020.

This extension is due to delays caused by the lockdown and other environmental hindrances to business caused by the Covid-19 pandemic.

On issue of such direction, the Registrars of various states, including for NCT of Delhi & Haryana have issued Orders of the same date.

TCS on Sales Above Rs. 50 Lakhs w.e.f. 01-Oct-2020

Applicability

a) Turnover > Rs. 10 Crores: Person having sales turnover or gross receipts exceeding Rs. 10 crores in the immediately preceding financial year; and

b) Sale > Rs. 50 Lakhs: Receives any amount  as consideration for sale of any goods (excluding exports) of the value or aggregate of such value exceeding Rs. 50 lakhs.

c) Excluding:

- export of goods

- goods already covered under TCS provisions

- buyer is required to deduct TDS of the seller on such transaction

- if the buyer is Central Government, State Government, Local Authority, Embassy/ Consulate/ High Commission

TCS @ 0.1% w.e.f. 01-Oct-2020

a) Rate: From 01-Oct-2020, such seller will have to collect TCS at the rate of 0.1% on the sales consideration received from buyer exceeding Rs. 50 lakhs.

b) Reduced Rate up to 31-Mar-2020: Only for the period between 01-Oct-2020 to 31-Mar-2021, such TCS will be at the reduced rate of 0.075%.

c) No PAN Case: In case the buyer does not provide his PAN, TCS is to be charged @1% (reduced to 0.75% only up to 31-Mar-2020).

No MEIS Incentive w.e.f. 01-Jan-2021

The Ministry of Commerce and Industry has released Notification No. 30/2015-2020 dated 01-Sep-2020, by which it has made the following changes to the Merchant Export Incentive Scheme (MEIS).

1) An exporter cannot claim a total reward under the scheme for exports made between 01-Sep-2020 to 31-Dec-2020 of an amount above Rs. 2 crore.

2) An IEC holder who has not made any exports for one year or more before 01-Sep-2020 or any new IEC registrant after 01-Sep-2020 would not be eligible for any claim under the MEIS scheme.

3) The scheme stands withdrawn with effect from 01-Jan-2021.

4) An exporter may also not be eligible for claim up to Rs. 2 crore, and the ceiling of such amount may further be dropped so as to ensure that the amount allocated by the government for this scheme from September to December 2020 does not exceed Rs. 5000 crore.