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Research Note On RSU and ESOP

The document discusses Restricted Stock Units (RSUs) and whether they can be included in an Employee Stock Ownership Plan (ESOP) policy. It provides examples of companies that include RSUs in their ESOP policies and analyzes relevant regulations. The document also compares RSUs and ESOPs, explaining the key differences between the two types of employee equity compensation.

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devendra bankar
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58 views

Research Note On RSU and ESOP

The document discusses Restricted Stock Units (RSUs) and whether they can be included in an Employee Stock Ownership Plan (ESOP) policy. It provides examples of companies that include RSUs in their ESOP policies and analyzes relevant regulations. The document also compares RSUs and ESOPs, explaining the key differences between the two types of employee equity compensation.

Uploaded by

devendra bankar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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1) Whether Restricted Stock Units (RSUs) can be included in an ESOP policy of a

Company?

Even though RSU’s does not come under the definition of ESOP as per Section 2(j) and 2(z)
of SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 many
companies like WIPRO, Mindtree, Tejas Network etc have included Restricted Stock Units
under their ESOP policies.

- Wipro’s ESOP and RSU Policy:


https://www.wipro.com/content/dam/nexus/en/investor/annual-reports/2020-2021/disc
losure-under-sebi-share-based-employee-benefits-regulations-2014-for-the-year-ende
d-march-31-2021.pdf.

- Mindtree’s ESOP and RSU Policy:


https://www.mindtree.com/sites/default/files/2019-06/details-under-sebi-share-based-
employee-benefits-regulations-2014.pdf.

- Tejas Network’s ESOP and RSU Policy:


https://www.tejasnetworks.com/main-control/download/ESOP-Website-Disclosure-20
19-20.pdf.

- Infosys’s ESOP and RSU Policy via their Trust:


https://www.infosys.com/investors/reports-filings/documents/disclosures-pursuant-seb
i-regulations2021.pdf.

Section 2(j) states that “ESOS” means a scheme under which a company grants employee
stock options to employees directly or through a trust;”

Section 2(z) defines “option” as the option given to an employee which gives such an
employee a right to purchase or subscribe at a future date, the shares offered by the company,
directly or indirectly, at a pre-determined price.

Therefore, though Restricted Stock Units may be granted either directly (Tejas
Networks) or through a trust (Infosys), they are not options within the meaning of S. 2
(z) and hence not ESOS under S. 2 (j). RSUs do not give the employee the option to purchase
or subscribe the share, rather they are a scheme under which the employee will be entitled to
the shares at the end of vesting period so long as the restrictions relating to duration of
employment and performance parameters are met.
2) What is meant by cashless esop scheme under FEMA (Transfer and Issue of
Foreign Securities) Regulations and Master Direction on Overseas Direct
Investments. What is the mechanism in which a foreign company can give
cashless ESOPs?

The Term “Cashless ESOP” has not been defined anywhere under FEMA (Transfer and Issue
of Foreign Securities) Regulations, 2004 or Master Direction on Overseas Direct
Investments.

However, Regulation 22 and Section C.1 of FEMA (Transfer and Issue of Foreign
Securities) Regulations, 2004 and Master Direction on Overseas Direct Investments
respectively deal with Acquisition of Shares via Cashless ESOP.

The wordings in both the regulation is same which is as follow:

“(1) A person resident in India being an Individual may acquire foreign securities:

(iii) To acquire shares under cashless Employees Stock Option Programme (ESOP) issued
by a company outside India, provided it does not involve any remittance from India;”
Mechanism for transferring Cashless ESOP:

To purchase equity shares offered by a foreign company under its ESOP Schemes, if he is an
employee, or, a director of an Indian office or branch of a foreign company, or, of a
subsidiary in India of a foreign company, or, an Indian company in which foreign equity
holding, either direct or through a holding company/Special Purpose Vehicle (SPV)
irrespective of the percentage of the direct or indirect equity stake in the Indian company:

AD Category – I banks are permitted to allow remittances for purchase of shares by


eligible persons under this provision irrespective of the method of operationalisation of the
scheme i.e. where the shares under the scheme are offered directly by the issuing company or
indirectly through a trust / a Special Purpose Vehicle (SPV) / step down subsidiary, provided

(i) The shares under the ESOP Scheme are offered by the issuing company globally on a
uniform basis, and

(ii) An Annual Return is submitted by the Indian company to the Reserve Bank through the
AD Category – I bank giving details of remittances / beneficiaries, etc.

Amounts payable on sale of any shares held pursuant to exercise of Foreign Options by
Indian employees are repatriated to India within 90 days.
The foreign company may also choose to repurchase the granted or vested Foreign Options
and/or shares issued pursuant to exercise of Foreign Options in terms of the ESOP scheme/
offer document and, in such a scenario, an annual return is to be filed by the foreign
company’s Indian office, specifying the details of remittance.

3) Can RSUs be considered to be a direct investment under FEMA (Transfer and


Issue of Foreign Securities) Regulations?

The Answer to the question is still debatable. Regulation 20A of FEMA (Transfer and Issue
of Foreign Securities) Regulation, 2004 states that:

“A resident individual satisfying the criteria as per Schedule V of this Notification, may make
overseas direct investment in the equity shares and compulsorily convertible preference
shares of a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) outside India.”

Since, any resident individual making a direct investment under FEMA needs to invest a
certain sum of monies in order to acquire equity shares of a JV or WOS. Whereas in RSU, the
shares which are already with the company, are given to the employee after fulfilment of
certain conditions. The employee’s are promised company shares after the restriction imposed
are removed by fulfilling certain conditions.

The major difference lies in the fact that, the holder of equity share has a voting power
equivalent to the share held by the investor on the other hand, RSU doesn’t grant any voting
right.

In my opinion, investing in a company by acquiring equity shares and employees


receiving Restricted Stock Units are two different concepts. Even Regulation 20A is
silent on the said issue. Thus, RSU can’t be considered to be direct investment under
FEMA (Transfer and Issue of Foreign Securities) Regulations), 2004.

4) Difference Between RSU and ESOP:

Restricted Stock Unit Employee Stock Option

Exercise Price None Based on the full market


value of the security.

Vesting No such time limit. Minimum 1 year.


Vesting a minimum time limit is Can be extended
the discretion of the company.
Voting rights No Upon exercise of the stock.

Taxability Since, no amount is paid by the In ESOP, the employee


employee to acquire the shares, purchases the share at a
the market value of the shares on predetermined price at a
the date of vesting is considered as future date. Thus, the
income difference between the
current market value and
price at which the share is
exercised is considered as
income.

Popular for this type Companies that are more mature. Early stage, High growth
of company start-up

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