The RBI has, by a notification dated June 11, 2015 (“Notification”), amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (“Regulations”) in relation to provisions relating to employees’ stock options and sweat equity shares.

The Notification introduces definitions for the terms “employees’ stock option” and “sweat equity shares”. Further, the existing regulation relating to employees’ stock options is substituted to provide that an Indian company (“Issuing Company”) may issue employees’ stock options at a pre-determined price and / or sweat equity shares (“Scheme”) to directors, officers or employees of its holding company in addition to its joint venture or wholly owned overseas subsidiary who are resident outside India subject to the following:

  1. The Scheme is in accordance with the regulations under the Securities and Exchange Board of India Act, 1992 or the Companies (Share Capital and Debentures) Rules, 2014, as applicable.
  2. The Scheme under which the non-resident employees / directors are issued the options / shares is in compliance with the sectoral caps applicable to the Issuing Company.
  3. Prior approval of the Foreign Investment Promotion Board will be required for the Scheme:​
  1. if foreign investment in the Issuing Company is under the approval route; or
  2. if the employee / director covered under the Scheme is a citizen of Bangladesh or Pakistan.
  1. The RBI may prescribe the necessary reports that need to be submitted by the Issuing Company and frequency thereof.

With the terms ‘employees’ stock option’ & ‘sweat equity shares’ being defined, there is less scope of ambiguity on the employee benefits and persons to whom such benefits can be extended to under the Scheme. Prior to the Notification, the employees of overseas joint ventures and subsidiaries were eligible to be covered under the Scheme while now, even the employees, directors and officers of these entities and the holding company of the Issuing Company can be covered.