Securities and Exchange Board of India
exempt Venture Capital funded companies.
8.1.2Currently, 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.
8.1.3The 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.
8.1.4Currently, 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.
8.2Incidence of tax
8.2.1At 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..
Incentives for Shareholders:
8.3.1The 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
Report of K B Chandrasekhar Committee on Venture Capital35