Employees Stock Option Plan
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Agenda Employees Stock Option Plan Sweat Equity Shares SAR/ Phantom CSOP/ MSOP/ TSOP 2 PRESENTED BY CA DARSHAK SHAH
ESOP
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ESOPv/s Sweat Equity Features
SWEAT EQUITY Eligibility All permanent Employees and Directors whether in India or Outside of Subsidiary and Holding Following are Not Eligible :1. Independent Director
Any employee belongs to Promoter group
Any Director holding directly or indirectly holding more than 10% (Not Applicable to eligible startups upto 5 yrs from incorporation) All permanent Employees and Directors whether in India or Outside of Subsidiary and Holding who are into business for more than 1 year Lock-in-period As per Plan/Scheme 3 years as per Company’s Rules
ESOPv/s Sweat Equity
Features
ESOP SWEAT EQUITY
1. Valuation of IPR:
1. Grant of options- Registered Valuer
• Listed Co. : Merchant Banker
Valuation
2. Exercise of optionsa) Listed Co.: FMV of RSE b) Unlisted Co.: Merchant Banker
Restrictions As mentioned in eligibility
• Unlisted Co. : Registered Valuer
2. Valuation of share issued :
• Listed Co.: FMV of RSE
• Unlisted Co.: Registered Valuer
As per Companies Rules:
Taxation
At exercise of option : Difference of Exercise price and FMV of shares taxed as Salary (Explained in detail in the later part)
This clause is not applicable to eligible startups. These Start-ups can issue sweat equity upto 50%
AtAllotment of Shares : Taxed as Salary
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5 Advantages Efficient standard agreement Access to Growth Stage Startups Financial Protection Direct Investment Information rights Disadvantages No entry on the Cap Table Mandatory Call Option No Voting rights No GST Credit Community Stock Options Pool PRESENTED BY CA DARSHAK SHAH
CSOPv/s SAR Features CSOP(Community SOP) SAR Subscription to this Options To be paid in cash Options are allotted for services rendered Exit Valuation Formula is applied as per contractual terms on the investment amount Difference of Shares prices for a period Relationship with the Company Investor Investee 1. Employer -Employee 2. Contractor-Contractee Liability in Balance Sheet As per Contractual Terms As perAS/ Ind-AS Valuation Cap As per contractual Terms the valuation cap can be froze As per the scheme terms Cash out flow It can be capped if the contract mentions It can be capped if the scheme mentions Regulations Contract Act SEBI , Co.sAct Cash inflow To be considered as Revenue No cash inflow 6 PRESENTED BY CA DARSHAK SHAH
SWEAT EQUITYv/s PHANTOM SHARES 7 FEATURES SWEAT EQUITY PHANTOM SHARES On Allotment Direct Allotment after lock in period No equity dilution as only cash is paid after the lock in period expires On Exercise Shares issued to employees at discounted price which is allwed as Compamies Act Compensation given to employees for appreciation of company share price over a period of time Cash-Flow Shares can be sold by employees after completion of lock in period for selling. No initial cash outflow as shared from wealth created Issued to Whom? To acquire IPR from Employee and Directors Can be used to pay vendors and consultants also Impct on Financials ? Impact to P&L in the year of allotment. : FMV value Impact to P&L each reporting year until liability is Discharged Taxation ? Taxed on Allotment Taxed on receipt of cash Valuation ? Taxed on FMV Taxed on differential value – business income PRESENTED BY CA DARSHAK SHAH
SHARE PAYMENTS
NON-SHARE PAYMENTS FEATURES
ESOP SWEAT EQUITY SAR PHANTOM SHARES CSOP
On Allotment Conditional allotment Direct Allotment
No equity dilution No equity dilution
On Exercise Option get converted to equity share on future date
Shares issued to employees at discounted price
Compensation given to employees for appreciation of company share price over a period of time
What happens at initial stage of allotment
It is formof SAR Are shares issued here ?
Cash-Flow No cash outflow at all
Share can be sold by employees after completion of lock in period.
Issued to Whom? To employees and directors to retain them To acquire IPR from Employee and Directors
Impct on Financials ?
Impact to P&L during vesting period : Grant value – exercise value
Impact to P&L in the year of allotment. : FMV value
Mostly Issued by listed company since FMV is readily available
No initial cash outflow as shared fromwealth created
Whether there is any cash outflow for subscribers ?
Can be used to pay vendors and consultants Can be used to pay vendors and consultants Used at which level and how ?
Impact to P&L each reporting year until liability is Discharged
Taxation ? Tax on Exercise Taxed on Allotment
Impact to P&L each reporting year until liability is Discharged
What can be the impact on financials ?
Valuation ? FMV – Exercise price Taxed on FMV
Taxed on receipt Taxed on receipt
Taxed on differential value Taxed on differential value – business income
How will it be taxed in the hands of subcriber and the Company ?
What will be the valuation at redemption ?
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Trust Route of issuing ESOP
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Tax Implications
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FAQ w.r.t ESOP& SAR
Tax implications on preferential allotment to consultants
Whether TDS is required to be deducted on equity issued to consultant “u/s 194R” perquisite ?
Can method of valuation be Questioned byAO – even in case of preferential allotment?
Whether ESOP discount is allowable in vesting period?
Whether SAR is taxable as perquisite or Capital gain?
Whether SAR is allowable every year of appreciation?
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Taxationin caseofvaluationcappingordiscountcapping
Whether investment in CSOP allowed as deduction on redemption ?
Whether Gift tax may be applied CSOP holder on allotment of shares ?
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Taxation Aspects of the ESOP
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TheFinanceAct2022amendment– FromtheFY2020-21,an employeereceivingESOPsfroman eligiblestart-upneednotpaytaxin theyearofexercisingtheoption.TheTDSonthe‘perquisite’ standsdeferredtoearlierofthefollowingevents
Particulars : Amount Rs.
Total Income before including perquisite value of ESOPs (A) 40,00,000
Add: Perquisite Value of ESOPs (B) 90,00,000
Total Income after including perquisite value 1,30,00,000 of ESOPs ©
Tax on Rs. 1.30 crores as per slab rates applicable for 37,12,500 Assessment Year 2021-22 as per old taxation regime (D)
Add: Surcharge [E = D * 15%] 5,56,875
Add: Education Cess [F = (D + E) * 4%] 1,70,775
Total tax liability forAssessment Year 2021-22 after considering 44,40,150 perquisite value of ESOPs [G = D + E + F]
Tax liability attributable to salary income (excluding 13,66,200 the perquisite of ESOPs) [G *A/ C]
Particulars Amount Rs.
Total tax liability forAssessment Year 2021-22 after 44,40,150 considering perquisite value of ESOPs
Less: Tax already paid at the time of filing of return for the 13,66,200 Assessment Year 2021-22
Differential amount to be deducted or paid by the 30,73,950 employer or employee in theAssessment Year 2025-26
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