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Budget Amendments 2007: FBT on ESOPs clarified, cement spared

Budget 2007 has new amendments:. The finance minister has announced a change in the ESOP FBT concept – now the FBT will:
a) be levied on the date of vesting
b) be passable to the employee.

Only b) is good for the company – that means the FBT levy is not on the company and will not impact earnings.

For you as shareholders, what this means is that employees will most likely exercise at least part of their shares on vesting, to pay the 33% tax. Typically 1/3rd of the shares that vest will be exercised, to pay the FBT, which is 33% of the difference between the exercise price and the market price. This exercise will result in fresh shares being issued and therefore impacting EPS.

If you think that is not much, think again. Infosys is showing 3% lower EPS growth next year because of the impact of exercised options. That is HUGE – their profit will grow 25% or so but their EPS by 22%, they say, due to the exercised option impact.

Another thing in the amendments is for cement manufacturers: From a flat duty structure of Rs. 600 per tonne, for cement priced above Rs. 190 per bag, the FM has proposed to make this a 12% duty instead. That means for cement priced at Rs. 200 per (50 kg) bag, you pay Rs. 24 as duty, translating to Rs. 480 per tonne. This is perhaps cheaper than eariler but still quite a bit higher than the pre-budget duty of Rs. 350 per tonne. But cement companies which have been hammered by the budget impact may see some relief with this move.

  • Akash says:

    >Hi Deepak,

    “Typically 1/3rd of the shares that vest will be exercised, to pay the FBT, which is 33% of the difference between the exercise price and the market price. “

    1 What is the difference between exercise price and market price in above stetement ? Did you mean diff between offer price and vesting price ? Or diff between offer price and market price ?

    2. If it is vesting price what impact market price has on FBT on ESOP excercising ?

    3. If it is vesting price what if vesting price is less than offer price ?

    Please let me know.

    Akash shah

  • Deepak Shenoy says:

    >1) Exercise price is hte price the option was offered. So yes, it’s the diff between the offer and market prices tha I refer to.

    2) Market price at the date of vesting will be used.

    3) If market price is less than offer price no FBT applies.

  • vishy says:

    >Hi Deepak,

    I’m 27, a software professional from Chennai. I enjoy reading your informative posts. I’m planning for a term insurance cover of 20 – 25 lacs. I’ve SBI shield plan in my mind. If possible, can u suggest me any other good policy with maximum benefits ?

    Looking forward ur informative reply.

    Thanks in advance.

  • Akash says:

    >Hi Deepak,

    Thanks for the answers. But I am still confused. Because our employer allows ESOP excercise at later date than vesting date.

    Let me give example:

    For ESOPS offered by company at 100 Rs per share:

    1. offer price 100, mkt price at vesting 110, mkt price at excercise 120

    Fine. I pay FBT for (110-100)* no of shares excercised

    2. offer price 100, market price at vesting 90, mkt price at excercise 120

    This is tricky because FBT is on difference between vesting and offer price. What happens in this case ????

    Please clarify. Thanks a lot in advance !

  • Deepak Shenoy says:

    >In case 2, you pay Zero Fbt at vesting since the market price at vesting is less than the offer price. That’s the end of the matter.

    but that’s my understanding – let the rules come out (they aren’t yet written down) adn we will all be sure.

  • Anonymous says:

    >Deepak Wrote:
    This exercise will result in fresh shares being issued and therefore impacting EPS.

    Hi Deepak,

    Please clarfy on this. Why fresh shates should be issues by the company-


  • Deepak Shenoy says:

    >Vishwanathan: IF ESOPs are exercised, fresh shares are issued by the company (that’s how ESOPs currently work). The number of shares issued is equal to the number of options exercised.

  • Anonymous says:

    >I was wondering how would a company recover FBT if an employee were to leave while things are muddy and not clear? Or maybe leave when the day a company tries to recover FBT.

    If the ESOPs fetch you a fortune, now would be a good time to leave and let the employer tackle the FBT? Sounds disloyal? well my country ain’t too loyal to me either?
    Inflation ; high home loans EMIs ; 1% extra cess that I have no idea where it goes ; FBT on ESOPS.

    It seems we are going back in time when the political parties wanted people to concentrate on the basics and not bother about corruption too much.

    Well I have finances to handle too so leaving the company is not an option i have overruled yet.

  • Deepak Shenoy says:

    >They’ll recover FBT on the day you vest – meaning if you leave, you will not make money from the options either.

    Btw, your country has been very loyal – you get the opportunity to make lots of money because of it. Anyhow, that’s a different argument.

    Anyhow, your employer will have other things they can hold you against, like the amount payable against your unclaimed leave and stuff, which they will just deduct when you leave, I guess. But most likely they will deduct the money as you exercise the option (you have to pay the company to buy don’t you)

  • Anonymous says:

    >Hi Deepak-

    I’m a non-Indian employee of one of the Indian IT majors and am already vested in all my ESOPs as of last year.

    1) As a foreign employee who’s never paid taxes/FBT to India in the past but rather only taxes domestically, am I still liable for FBT?

    2) I vested in my ESOPS in “blocks” over several years (10%, 20%, 30%, 40%) My assumption is that the FBT is based on the market price at vesting for each of the blocks for the # of shares in each block?

    3) With my vesting dates all in the past, does this new tax apply retroactively? Does the tax rather only apply to non-vested shares that become vested in the future (and will therefore not impact me?)

    4) Should I be expecting a big FBT tax bill to roll in from my employer any time soon? :’< I’m sure you don’t have all these answers but would appreciate any insights you may have! Thank you!

  • Deepak Shenoy says:

    >Mitchell: Honestly I am not a lawyer so I can’t say I know any of these answers for sure.

    1) Unless you pay taxes abroad I think you might be liable for FBT.

    2) Yes you’re right about the vesting and the fact that market price at vesting is the factor. But if you had exercised these options prior to March 31, you would not have to pay FBT. It’s payable at exercise.

    3) the tax is applicable at the time of exercise they say, so I believe you may have to pay if you exercise it now (or post April 1, 2007)

    4) Depends on your employer. the liability applies as of the vesting date, but your employer may claim it right now, in which case you will need to exercise such amounts of the options so as to pay the FBT.

    Again, please get an accountant or lawyer to confirm – this is just my understanding.