Equity-based compensation

Typical forms

What are the prevalent forms of equity compensation awards in your jurisdiction? What is a typical vesting period? Must the arrangements be offered to a broad group of employees, or can the employer select the participants?

Employee stock options are the most prevalent form of equity compensation to executives in India. As per the Companies Act, there is a minimum of one year between the grant and vesting of stock options. Moreover, companies may specify additional lock-ins on the sale of shares issued pursuant to the exercise of stock options (with a mandatory period of one year in the case of publicly traded companies). Companies have the discretion to offer equity compensation awards to an executive (depending on a pre-determined eligibility criteria) or a specified group of executives, provided that such executives are eligible to receive equity compensation under the Companies Act.

Companies that have been in business for at least one year may also allot sweat equity shares to their directors or executives. These are shares issued at a discount in consideration against know-how, value additions or intellectual property provided by the executive to the company. Sweat equity shares allotted by publicly traded companies must be locked-in for a period of three years.

Additionally, equity settled stock appreciation rights (SARs) are another form of equity-based compensation used by publicly traded companies. The implementation of these rights is regulated by the Securities and Exchange Board of India (Share-Based Employee Benefits) Regulations 2014.

Must equity-based compensation be granted by the company’s board of directors (or its committee) or can the authority be delegated to officers or employees of the company? Are there limitations or requirements that apply to delegation?

Equity compensation to executives, in the form of stock options, must be granted in accordance with a company’s employee stock option plan (ESOP) approved by its board of directors and shareholders. Companies may also constitute separate employee welfare trusts or compensation committees to administer the grant, vesting and exercising options under their ESOP.

Additionally, publicly traded companies must comply with the SEBI (Share-Based Employees Benefits) Regulations 2014 when granting equity compensation to their executive employees, including equity settled SARs.

Shares issued to an executive employee on exercise of stock options must be issued by the board of directors of the company, in accordance with the Companies Act.

Tax treatment

Are there forms of equity compensation that are tax-advantageous or disadvantageous to employees or employers?

The exercise of stock options or the allotment of shares pursuant to employee share purchase plans (ESPPs) is a taxable event. It is construed as a perquisite in the hand of the employee (ie, a benefit to which an employee is entitled on account of their employment), and the employer is required to deduct tax at source from the employee’s salary at the applicable rate and deposit this with the tax authorities within a stipulated timeframe. In the event that an employee sells the shares allotted pursuant to an ESOP or ESPP, the employee is liable to pay capital gains tax, depending on the period for which they have held such securities. Given that the tax treatment is broadly the same under ESOPs and ESPPs (being two prevalent forms of equity compensation), there are no specific tax advantages or disadvantages in choosing one form of equity compensation over the other.


Does equity-based compensation require registration or notice? Are exemptions, or simplified or expedited procedures available?

Employee stock options are generally granted to executives pursuant to grant letters. Details of such stock options are recorded in the statutory register of employee stock options maintained by the company under the Companies Act. Apart from this, there are no registration or notice requirements with respect to stock options granted by a company. With regard to equity compensation issued in the form of sweat equity shares, the company must file statutory returns after the allotment of such shares with the jurisdictional registrar of companies.

In terms of procedures, the ESOP of a company may allow a mechanism for accelerated vesting of options under conditions such as:

  • a change in control event;
  • resignations for good reason; or
  • death or permanent disability of an executive.

Under certain ESOPs, it is also common to have executives furnish powers of attorney in favour of certain senior employees of the company to vote on the shares held by such executives.

Withholding tax

Are there tax withholding requirements for equity-based awards?

Equity-based awards in the form of stock options are taxable as perquisites in the hand of the employee under Indian income tax law. Accordingly, companies are required to withhold tax deducted at source at the time that such stock options are exercised by an employee and deposit this with the applicable tax authorities.

Inter-company chargeback

Are inter-company chargeback agreements between a non-local parent company and local affiliate common? What issues arise?

Inter-company chargeback agreements in the form of guarantees or loans between a non-local parent company and its local affiliates are common in India. Issues that often arise while structuring these arrangements relate to valuation, taxation and compliance with the transfer pricing guidelines.

Stock purchase plans

Are employee stock purchase plans prevalent or available? If so, are there any frequently encountered issues with such arrangements?

ESPPs are not very common in India. Nonetheless, certain issues that arise while structuring ESPPs pertain to ascertaining lookback provisions, discounts in purchase price and tax treatment at the time of purchase of shares by employees.

Law stated date

Correct on

Give the date on which the information above is accurate.

31 October 2019.