New Taxation in India?

Last week while I was thinking about the ongoing issues for companies with equity compensation in India, the Federation of Indian Chambers of Commerce & Industry (FICCI) was considering the ongoing issues for employees. This week, FICCI issued a letter to the finance ministry asking that the taxation of ESOPs (Employee Stock Option Plans) be amended (See the press release here.).

In the proposal, FICCI asks that the discount value at grant, as opposed to the spread at exercise, be taxed as income. FICCI argues that only the discount provided by the company at grant represents the consideration given to the employee by the company; any increase in value after that is more like investment income. FICCI maintains that taxing the spread at exercise as a perquisite is counter to the SEBI guidelines for stock options.

The press release focuses on the section of the SEBI guidelines that stipulates the fair value of an option should not be adjusted for “changes in the price of the underlying stock, volatility, the life of the options, dividends on the underlying stock, or the risk-free interest rate.” Although the FICCI proposal does mention that SEBI guidelines define the FMV of an option as the market price prevalent on the grant date, it fails to mention that this “market price” referenced in the guidelines is actually the trading value of the option, or estimated trading value based on a valuation model (e.g., a Black-Scholes valuation). At any rate, this is merely a request to the finance ministry at this point. It remains to be seen whether or not the finance ministry will even entertain the idea. Because it would probably result in a decrease in tax revenue, my gut tells me no…but stranger things have happened!

Ads by Google: Or, “An ESOP by Any Other Name”

While reading an article on the FICCI proposal, Google ads saw a great acronym and gave me a targeted add for the ESOP Association. Because of that, I learned that October is Employee Ownership Month, which, I must admit, caught me by surprise. Although employee ownership is a foundation for most equity compensation, Employee Stock Ownership Programs (ESOPs) in the United States are specific programs under which shares of company stock are placed in a trust. Shares in the trust are allocated to employees based on whatever parameters have been set up by the company. The allocated shares typically vest over time, but vested shares are not actually issued to the employee until termination.

October has been Employee Ownership Month for more than 20 years; it’s a month set aside to educate the public (not just employees) about the benefits of employee ownership (i.e., ESOPs). According to the ESOP Association, “…companies celebrate with picnics to honor their employee owners, hold roundtable discussions with local public officials and organizations to spread the word about employee ownership, and some hold awards ceremonies to honor outstanding employees.”

So, I searched and searched, but I couldn’t find anyone that celebrates an “Equity Compensation Month.” With the cyclical nature of bad press on equity compensation, I certainly think we could benefit from one. Wouldn’t it be great if companies everywhere celebrated equity compensation at the same time?

If you are looking for more information on ESOPs, the National Center for Employee Ownership (NCEO) is a great resource.

-Rachel