ESOPs for foreign employees: how they work in India

An employee stock option plan, or ESOP, gives staff the right to buy shares at a set price in future. A cross-border ESOP is one where the employee and the company sit on different sides of India's border. There are two common versions. An Indian startup gives options to a person who works or lives abroad. Or a foreign parent company gives options to staff in its Indian subsidiary.

Because shares are being created or held across the border, the Foreign Exchange Management Act, 1999 (FEMA) applies. The Reserve Bank of India (RBI) writes the detailed rules, and the filings go through an authorised dealer bank. The tax side is separate and is covered in the ESOP taxation guide.

Yes. The FEMA Non-Debt Instruments Rules, 2019, in Rule 8, allow an Indian company to issue options or sweat equity shares to employees or directors who are residents outside India. This covers staff of the company itself and, according to summaries of the rule, staff of its holding company, joint venture or wholly owned overseas subsidiary.

Some conditions apply. The company's sector must allow foreign investment, and the issue must respect any sectoral cap or entry route. The grant is treated as foreign direct investment in the Indian company's books, so the ordinary FDI conditions, such as pricing and reporting, come with it. Citizens of certain neighbouring countries face extra approval rules under India's FDI policy, so a company with staff in those places should take advice first.

For a grant to a non-resident, the Indian company reports on Form ESOP through the RBI's FIRMS portal, via its authorised dealer bank. Law-firm summaries put the deadline at thirty days from the date the options or shares are issued. Late filing can be fixed through a late submission fee, so a missed date is not always fatal, but it should be fixed quickly.

A plan with only resident Indian employees needs no FEMA filing. The foreign angle is what triggers the form. Startups with a few staff abroad often learn this only when a due-diligence team asks for proof of filings during a funding round.

• Who files: the Indian company.
• Where: FIRMS portal, through the authorised dealer bank.
• Form: Form ESOP.
• When: within 30 days of issue, per law-firm summaries.
• Why it matters: investors check it during due diligence.

Yes, and the rules changed in 2022. Under the Overseas Investment Rules, 2022 and the related RBI directions, shares received by a resident under an ESOP of a foreign company are treated as an overseas portfolio investment. Earlier, many such holdings ran through the Liberalised Remittance Scheme. As described in law-firm notes, the revised framework moved them out of that scheme.

The Indian subsidiary usually has to report these holdings to its bank. Sources describe a half-yearly return and a certificate from the employer, but the form names and dates vary between sources, so the current RBI text should be checked. Employees who sell the shares abroad must also bring the money home within the time the rules set.

A startup hiring engineers in the US or Europe finds that a local offer without equity looks weak. Giving options of the Indian company lets the employee share in its growth. For a startup that has flipped to a foreign parent, which is common among companies raising from US investors, the parent issues the options and the Indian team is part of the same plan.

The trade-off is paperwork. Each country has its own securities and tax rules. A grant that is simple under Indian company law may need a local filing abroad, and the employee may owe tax in the country where the work is done.

When an Indian company issues shares to a non-resident, FDI pricing rules apply. In general the price must not be lower than the fair value worked out under the rules, with a valuation by a qualified professional. For options, the exercise price is usually set at the time of the grant, and the pricing test applies when the shares are actually issued, so a valuation needs to be on file at the exercise date.

Sector caps matter too. Some sectors, such as certain media, insurance or defence activities, limit foreign holding or require government approval. A grant to a non-resident counts toward the foreign holding. A startup near a cap should count the options of staff abroad together with the shares held by foreign investors before it issues more.

Overseas direct investment, or ODI, is about an Indian company or resident putting money into a foreign business. A foreign ESOP held by an Indian employee is classed as portfolio investment, not direct investment, and it is the employer that handles the reporting. The Liberalised Remittance Scheme lets resident individuals send a set amount abroad each year, and the exercise of a foreign ESOP is no longer meant to use it. The overseas investment guide covers ODI in full.

A missed or late filing is a contravention of FEMA, but the RBI has a route to fix it: a late submission fee for delays in reporting, or compounding for larger lapses. The cost depends on how late the filing is and on the amount involved. The practical risk for a startup is not only the fee. An unreported grant can hold up an investor's due diligence, a new funding round or an exit.

A simple routine helps. Keep a register of every grant to a person outside India, with the date, the number of options and the filing receipt. Review it before each financing and before any IPO filing, since regulators and investors both ask for it.

Three points come up most. First, check the sector cap before granting options abroad. Second, file Form ESOP on time and keep the proof. Third, line up the tax treatment with the plan documents, since an option that is cheap on paper can still create a tax bill when exercised. This guide is general information, not legal or tax advice, so confirm the current RBI rules with a professional.