Compensation through employee stock options (ESOPs) issued by Indian companies to their staff in countries bordering India has become difficult with the Reserve Bank of India mandating government approval before such issuances.

The immediate impact is it would make it difficult for employees and directors of subsidiaries of Indian companies in countries covered by Press Note 3 to acquire shares in the Indian parent entities by way of ESOP schemes as well as structuring compensation policies through such route, market experts said.

Press Note 3 covers investments by bordering countries such as China (including Hong Kong), Nepal, Bangladesh, Bhutan, Myanmar, Afghanistan and Pakistan.

The ongoing deliberations regarding government approval for granting ESOPs to employees in land border-sharing countries is likely to impact a wide range of entities, especially those with a global footing, said Makarand M Joshi, Founder of MMJC and Associates.

“This could have adverse implications for such subsidiaries and their Indian parent entities in the short term as they may need to put in place alternate means to be able to compensate their employees/directors in such jurisdictions,” said Vinay Joy, Partner at law firm Khaitan & Co. “It could also result in potential attrition for such companies,” he added.

Affected parties

Employees and directors of subsidiaries of Indian companies in the bordering countries who have received stock options in the Indian parent entity would be the affected parties in addition to their employer entities.

 “Given that many major Indian companies in fields like IT, engineering, pharma, automobiles and banking in India (including the likes of SBI, ICICI, TCS, Infosys, Wipro, Sun Pharma, Tata Motors, JLR, Sundaram Fasteners etc) have operations in such jurisdictions, this is likely to have a big impact on their compensation policies going forward in these jurisdictions,” Joy pointed out.

“While one can argue that ESOP is a contract and not an investment in equity shares, it’s a technical reading of the law,” said Payaswini Upadhyay, Counsel & Leader- Regulatory and Policy Practice, Resolut Partners. “In spirit, an issuance is likely to breach the intent of PN3. It may not be a breach today but will be upon conversion, once the vesting period for the ESOPs ends,” she explained.

Whether government approval shall be required for issuing ESOP to employees who are citizen of land border sharing countries only or non-citizens who are situated in such countries for employment or such other purposes also complicates the determination of requirement of approval. “This clarification, if not navigated proactively, can disrupt both current and future ESOPs, affecting long-term reward strategies for employees in these strategically sensitive countries,” said Joshi.

Direct and Indirect investments

In 2020 foreign direct investments from China and Hong Kong were tightened under Press Note 3 requiring government approval. The restrictions applied to both direct and indirect investments.

S Subramanian, MD of proxy advisory InGovern however said ESOPs issued to employees in bordering countries will not have major impact as the compensation package can always be reworked to include higher cash components depending on the performance of both the company and employees tenure.

“In any case, in the last few years, the ESOPs distributed by India Inc to citizens of the neighbouring countries would be insignificant,” he added.

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