This was communicated to banks on Monday by the Reserve Bank of India as part of the amended guidance on foreign investment reporting and management system, two persons told ET.
Companies will have to report the details of overseas persons exercising employee stock options plans to the banks, which in turn will inform the regulator.
“The intent of the clarification seems twofold: one, to streamline issues for ESOP and its variables related reporting, downstream investment and also to be able to ascertain and track ownership of shareholders under these routes, especially for sensitive sectors and investments from sensitive regions,” said Moin Ladha, partner at law firm Khaitan & Co.
The updated instructions also lay down the reporting mechanism connected with foreign portfolio investors (FPIs) transiting to FDI, valuation of unlisted shares in FDI transactions, and change of ownership in downstream FDI investments – where a company incorporated in India but owned and controlled by offshore investors transfers shares.The regulatory guidance will clear the air on various forms of ESOPs: cashless exercise – where a non-resident employee exercises notice but does not pay the exercise price leaving it to the company which sells some shares to recover the exercise amount and issues the balance shares to the employee; SARs – where the company sells the balance shares (after recovering the exercise price) and remits the sale proceeds to the employee; cash-based exercise where the employee pays the exercise price but a trust holds the shares on behalf of the employee – in this case employees would have to be recognised as beneficial owner of the shares; or where a trust sells some shares to recover the exercise price and transfers the remaining shares to the employee; or, in a case where the trust shares even the balance shares to remit the amount to the employee.
There have been lapses on the part of companies in reporting on transfers of shares or remittances under cashless schemes, and in cases where the transactions were carried out by a trust. Now, employees to whom securities were issued or remittances made would be identified as beneficial owners by virtue of the economic rights.
Harshal Bhuta, partner at CA firm PR Bhuta & Co, said: “It is a welcome development. The RBI guidance would go a long way in standardising the FDI reporting requirements related to exercise of options involving trust route, cashless mechanism and also where SARs are involved. Similar guidance should also be issued under the overseas investment rules for reporting of cashless ESOPs, etc. given by foreign companies to resident Indian employees.”
The RBI has stated that when FPI in a company exceeds 10% of its capital, it will be considered as FDI, and to track these investments, any conversion from FPI to FDI must now be reported using the FC GPR form, said Rajesh Gandhi, partner at Deloitte India. “This change aims to improve transparency and ensure proper documentation for investment exits.”
For reporting of FDI on reclassification of FPI, the investment in excess of permissible limits as well as the original investment has to be reported. Once an FPI crosses the 10% limit to hold another 2% in a company, the entire 12% is considered as FDI. According to the RBI directive, the FPI has to report the average price of acquisition as the additional shares may have been bought in multiple transactions.
On valuation of a company, which assumes significance as unlisted local business attracting foreign capital have to follow certain pricing guidelines.