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Impact of New Exchange Control Rules in India on Equity Awards

March 01, 2023

The new Overseas Investment (OI) Rules issued on August 22, 2022 replace all previously available exemptions to grant share-based awards to Indian residents with a single exemption (the new “general permission”), which requires, inter alia, that semi-annual reports be filed with the Reserve Bank of India (RBI).

The reports will need to be submitted by an Authorized Dealer Bank in India (i.e., the bank in India involved with the remittance of funds under the plan) and include information on the number of shares issued to Indian residents and funds remitted from India to purchase shares (if any).

Prior Rules

Under the prior rules, employees or directors of an Indian entity could acquire and hold shares issued under an employee equity compensation plan (referred to under Indian law as an employee stock ownership plan) offered by a foreign company without approval from the RBI broadly under two exemptions:

  • The first exemption related to “cashless” programs (for example, stock options subject to a cashless exercise requirement or restricted stock units), where there were no remittances of funds from India in connection with the awards.
  • The second exemption was the so called “general permission” that was available provided (i) the ESOP was offered on a globally uniform basis, and (ii) the Indian entity submitted an annual report on the Form ESOP to the RBI reporting the details of the remittances and participants in the ESOP.

Typically, companies would rely on the general permission when offering an employee stock purchase plan, where the local subsidiary remits employee contributions out of India for the purchase of shares.

Additionally, under the Liberalized Remittance Scheme (LRS), individuals were permitted to remit up to US$250,000 out of India each financial year for certain permitted transactions (which was understood to also cover the acquisition of foreign securities).

New Rules

Under new rules introduced on August 22, 2022, employees and directors who receive shares under an ESOP offered by a foreign company are considered to have received an Overseas Portfolio Investment (OPI) and the local Indian entity must comply with the requirements under the new Indian Overseas Investment Regulations (“OI Regulations”).

Under the new OI Regulations, foreign companies granting equity awards or stock purchase rights to employees and directors of their related Indian entities under an ESOP or similar plan must comply with the new general permission. There is no longer a separate exemption for cashless stock options or similar awards (such as RSUs).  

Further, RBI also revised the Master Direction—Liberalized Remittance Scheme (LRS Master Direction) in connection with its overhaul of the exchange control rules. The revised LRS Master Direction no longer applies to the acquisition and holding of shares in a foreign company by employees and directors of their related Indian entities under an ESOP but requires that all such transactions be completed under the new OI Rules. 

Under the new general permission:

  • The ESOP must be offered on a globally uniform basis (e.g., on same general terms as applicable to other subsidiaries of the issuing company); and
  • The Indian entity must now submit semi-annual reports on Form OPI to the RBI through its Authorized Dealer Bank. The reports are due for the periods ending March 31 and September 30, and must be submitted within 60 days after March 31 and September 30, respectively. 

Further, the repatriation requirements were modified such that, if an individual acquires securities that represent (in the aggregate) less than 10% of the company's share capital, the individual will be required to repatriate any proceeds related to the securities within 180 days of receipt (unless the amounts are reinvested by the individual in compliance with the new rules within the 180-day period). In the unlikely event that the individual acquires securities that represent (in the aggregate) 10% or more of the company's share capital, the individual will be required to repatriate the proceeds within 90 days of receipt. It remains the individual's responsibility to comply with the repatriation requirements.

Information to Report on Form OPI

The following information has to be reported on the Form OPI:

  1. Net amount of ESOP investment held abroad (opening balance) at cost basis;
  2. Investments made during the half year (ended March / September) (including reinvestment);
  3. Disinvestments made during the half year;
  4. Net amount of investments held abroad (closing balance) 1 + 2 - 3);
  5. Remittance Amount;
  6. Repatriation Amount;
  7. The report also requires a declaration by the Indian entity that includes: (1) the name of the foreign entity issuing/repurchasing the shares; (2) percentage interest and the shares or percentage interest allotted/repurchased during the relevant six-month period; and (3) the number of employees/directors who acquired and sold shares during the six-month period.

As the Authorized Dealer Bank has to submit the Form OPI on behalf of the company, companies will need to confirm with the bank how to complete the Form OPI.   

Penalties for Late Filings

Penalties apply for late filings and for failure to file a return. In the case of a late filing, the company may submit the required Form OPI through the Authorized Dealer Bank and pay a small late fee (INR 7500 (approximately USD 93)) per return.

Where the company fails to file the Form OPI, there may be additional penalties under the Foreign Exchange Management Act, 1999 (FEMA). Any person who violates the provisions of the FEMA or any rule, direction, regulation, order or notification issued under the FEMA is liable for a penalty of up to three times the sum involved in such violation (where the amount is quantifiable) or INR 2,00,000 (Rupees two lakhs) (approximately USD 2,483) (where the amount is not quantifiable). Where the violation is ongoing, there is an additional penalty of up to INR 5000 (Rupees five thousand) (approximately USD 62) for each day of non-compliance. 

Next Steps

Companies granting share-based awards to employees and directors of their Indian entities will need to determine if they can rely on the new general permission, and if so, be prepared to file the Form OPI on a bi-annual basis. Further, as the items to report on Form OPI are subject to interpretation, companies will need to discuss with their Authorized Dealer Bank how to complete the form.

  • By Baker McKenzie

    Global Equity Services