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ESOP FBT Clarification

Notification on ESOP FBT :

  • Fair market value of the stock option is the value of hte share on the date of vesting, if the stock is listed on an Indian exchange. (Average of Open and Close price).
  • If it’s unlisted or listed in other exchanges (non Indian) the value must be determined by a “Category 1” merchant banker (registered with SEBI). Such merchant bankers are fairly big, and I think would now charge extremehly high fees for valuation.
  • Companies need to pay 33.99% of the difference between the fair market value and the grant price, and this FBT applies on the day of VESTING, not exercise.
  • I don’t know what happens to foreign listed companies, like Genpact, Rediff etc. whose employees get options in India. They’ll probably need a Cat 1 Merchant banker assessing them every six monts or so.
  • I also don’t know what happens if you don’t exercise on vesting – I’m assuming the company still needs to pay the tax, so they’ll soon find ways to get it from you.
  • This valuation clarification is only valid from Assessment Year starting 1st April 2008, meaning (thanks to commenter Pronto) that it has been valid since April 2007 for FY 07-08. Assessment years are the year after the actual financial year.
  • There’s still a lot of confusion, but this is very bad for unlisted startups, who now need to get themselves assessed every 6 months by a category 1 merchant banker, whose fees I would imagine are quite high. This is pure stupidity and spells the death knell for option grants as we know it.
  • I think innovative “structured” products will start appearing with third party entities holding stock and transferring them to the employee when required etc. This can be done using trusts, and I think we’ll go back to that era again.

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