8.1 Incentive for Employees - Employees Stock Option Plan (ESOP)

8.1.1 Currently, the Stock Options shall be available to non-resident and resident permanent employees (including Indian and overseas working directors) of the company. The Stock options shall not be available to the promoters and their relatives as( defined under the Companies Act). Venture Capital funded companies typically have a large option pool for their employees from 5-30% of the Issued equity. This would include Incubator, CEO and the Start-up team. Currently, these persons would come under the meaning of "Promoter" under the ESOP guidelines and hence may not qualify for ESOP. This has to be amended to exempt Venture Capital funded companies.

8.1.2 Currently, the RBI permit's Indian resident employees investment upto US$10,000 in a period of 5 years under an employee Stock Option Scheme of a foreign company. This limit should be enhanced to US$100,000 during a five year period.

8.1.3 The general FERA permission for resident employees of software companies under the ADR/GDR linked stock option scheme has been granted by the Reserve bank of India which entitles a resident employee to acquire and /or hold ADR/GDR linked stock option, acquire ADR/GDR on exercise of the option, remit funds upto a limit of $50,000 in a block of five years for acquisition of ADRs/GDRs and to retain or continue holding ADRs/GDRs so acquired. The resident employee upon liquidation of the ADR/GDR holding would need to repatriate the proceeds to India unless a general/specific permission from the RBI is obtained for its retention or use abroad. This limit should be enhanced to US$100,000 during a five year period.

8.1.4 Currently, if foreign employees wish to participate in Employees Stock Option Scheme of an Indian Company with repatriation benefits then, they can do so on an automatic basis within the overall ceiling of 50% or 51% or 74% of the shares of the Indian Company depending on the type of industry in which the Indian Company is engaged. It is proposed that foreign employees be allowed to participate under an Employee Stock Option Scheme so as to invest in shares of an Indian Company with full repatriation benefits with an upper ceiling of US$100,000 over five years.

8.2 Incidence of tax

8.2.1 At present, when the option is exercised by the employee, it is taxed in the hands of employee as income from salary and when the shares are actually sold, that is taxed separately. It is recommended that the employees who have opted to exercise their option under ESOP be taxed only at the time of exit i.e. sale of shares by them and not at the time of exercise of the option. Globally this practice is followed in many countries..

8.3. Incentives for Shareholders:

8.3.1 The shareholders of an Indian company that has venture capital funding and is desirous of swapping its shares with that of a foreign company should be permitted to do so. Similarly, if an Indian company having venture funding and is desirous of issuing an ADR/GDR, venture capital shareholders (holding saleable stock) of the domestic company and desirous of disinvesting their shares through the ADR/GDR should be permitted to do so. Internationally, 70% of successful startups are acquired through a stock-swap transaction rather than being purchased for cash or going public through an IPO. Such flexibility should be available for Indian startups as well. Similarly, shareholders can take advantage of the higher valuations in overseas markets while divesting their holdings.

8.4 Global investment opportunities for domestic VCFs

8.4.1 With increasing global integration, it is important that the domestic venture capital funds also have the opportunities to invest abroad. This would enable them to generate better returns globally and also expose them to the international market practices. We need to encourage Indian enterprises to become global. The domestic VCF should be permitted to make investments abroad under certain transparent, automatic norms subject to ceilings.

8.4.2 It is recommended that domestic VC Funds should be permitted to invest in securities of companies incorporated outside India. Such investment may be subject to a ceiling of higher of -

  • 25% of the Fund Corpus, or
  • US$ 10 million per VC Fund or
  • to the extent of foreign investment in the corpus of the VC Fund

8.5 Liberalise Sweat Equity issuance norms

8.5.1 Under Section 79A of the Companies Act, 1956, a company can issue sweat equity only one year after it is entitled to commence business. This provision negates the possibility of sweat equity issuances in start-ups. The government should relax the one-year lock-in period.