Cross-border Issuance of ESOPs: Developing Indian Landscape

The issuance of Employee Stock Option Plans (ESOPs) by foreign companies to resident Indian employees is governed by the Foreign Exchange Management Act, 1999 (FEMA) and related regulations, including the Overseas Investment (OI) Rules, Regulations, and Directions of 2022, as well as the Reserve Bank of India's Liberalised Remittance Scheme (LRS). ESOPs provide employees the right to acquire shares or equity interests in the foreign entity. These are categorized as Overseas Portfolio Investment (OPI) if they represent less than 10% equity without control, otherwise as Overseas Direct Investment (ODI). The LRS permits remittances up to USD 250,000 per year for ESOP acquisitions, counting towards the individual's overall LRS limit. An emerging issue is the regulatory scrutiny of ESOPs by Indian companies to foreign nationals from countries sharing land borders with India, as outlined in Press Note 3, which requires government approval for investments from these countries, creating ambiguity around the treatment of ESOPs.

Read the complete article by Gyanendra Mishra, Partner and Mudrika Purohit, Associate on Chambers and Partners and Lexology.