Fixed pay structure will no longer help PSBs retain talent.

Fixed pay structure will no longer help PSBs retain talent.

Fixed pay structure will no longer help PSBs retain talent.

The idea of considering Employee Stock Options (ESOPs) in Public Sector Banks have been in talks for more than 5 years. In August 2015, Government announced to introduce ESOPs for the employees of PSU Banks. However there has been an air around actual implementation of the aforesaid idea. After a prolonged hassle of almost two years, the Finance Ministry has finally given its consent to implement ESOPs in PSU Banks.

The ministry is anticipating an improved performance and efficiency in the employees of PSBs due to introduction of this concept. This will make the employees of PSBs feel more valued and aligned to their work and targets and will lead to increase in bank’s profitability.

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Will Budget 2017-18 render ESOPs unattractive?

Will Budget 2017-18 render ESOPs unattractive?

The Finance Minister, Mr. Arun Jaitley, announced the Budget for 2017-18 on 1st of February, 2017. Under the Annexure III to Part B of Budget Speech, certain Additional Revenue Mobilisation (ARM) and Anti-abuse Measures in the area of Direct Taxes were announced. This included the proposal to restrict the exemption from long term capital gains in case of transfer of listed shares by providing that the exemption, subject to notification of certain exceptions, shall be available if security transaction tax has been paid at the time of acquisition of such shares where they have been acquired after 1st October, 2004.

The present provision in this regard is, Section 10(38) of the Income Tax Act exempts the long term capital gains arising in case of transfer of equity shares on or after 01-10-2004, where such transaction is chargeable to securities transaction tax (STT). However this provision has been modified in the latest budget and it is now proposed to levy tax on transfer of listed shares if the STT is not paid at the time of acquisition of such shares.

While certain allotments like IPOs, FPOs, Bonus or Rights Issues, acquisition by Non-Resident under FDI Policy etc. have been clearly excluded from applicability of the aforesaid provision on the grounds that in these cases STT cannot be paid at the time of acquisition of shares. However there are many more types of allotments of equity shares where the payment of STT cannot be made at the time of acquisition of shares. These include Private Placements, Employee Stock Options, conversion of convertible securities etc. Taking the example of ESOPs, wherein Employees are given a right to obtain the equity shares of the company at a pre-determined price and the employees can acquire shares of the company either by way of fresh allotment or through transfer of shares from the Trust. In case of fresh allotment, there is no question of paying STT upon acquisition. Even in cases where the Trust route is opted by the listed company and the trust acquires shares of the company from secondary market, the STT will be paid when the Trust will acquire shares. However the transfer of shares from Trust to employee will be an off-market transaction. In this manner, employee can never pay STT at the time of acquisition of ESOP Shares-neither in case of fresh acquisition nor in case of Trust route. Accordingly, the benefit of holding ESOPs for long term will not be available anymore.

By the announcement of this Budget, ESOPs and Private Placements have been put under grey area as there is no explicit clarity over the exemption from long term capital gains arising upon transfer of these shares by the holder of such shares. This will lead to dilution of the basic idea of wealth creation and retention of employees by granting ESOPs to them. They will not get any benefit by opting and holding ESOPs for a longer period.

Presently these are the specimen provisions and the actual exemptions are yet to come. Regulators need to consider to exempt ESOPs as well as Private Placements from the levy of long term capital gain tax upon non-payment of securities transaction tax at the time of acquisition.

Will Budget 2017-18 render ESOPs unattractive?

DEMONETISATION… not Demotivation!

DEMONETISATION… not Demotivation!

Motivating the Employees inspite of Demonetisation blues

The preceding year 2016 has given few gigantic reforms which are going to lay an impact worldwide. PM Modi’s surprise in the form of Note Ban in India is one of a major reform and whether this will prove to be a boon or a bane is still to be seen..!

A very bold move was taken by Shri Narendra Modi, our Prime Minister, on November 8th, 2016, when he announced that all 500 and 1000 rupee notes cannot be used anymore thereby giving a jolt to the country. This move is backed by his idea to curb black money circulation in India and thereby making it a corruption free place. But it is still to be concluded that how far this course of action will prove to be justified for the entire nation?

The major hit is been faced by the salaried class people of the country. The sudden invalidation of 500 and 1000 rupee notes which accounted upto 85% of the cash circulation in the country represented a significant monetary shock. Research have also shown that this black money accounted for a significant portion of India’s GDP. By putting this currency out of circulation, the overall GDP is also expected to low down in the short run. The brunt is being felt by all across industries, be it FMCG, Pharma, Manufacturing, Telecom, Infrastructure, BFSI etc.

However, the proverb “No gain without pain” holds true here as well. The ultimate idea is to seek a better future and fiscal growth of the country resulting out of a corruption free India. In the longer run, tax and interest rates on loans are expected to come down as higher income tax collections arising from better compliance would offer scope to reduce rates over the long term. The cash crunch has drawn all the attention and the industrialists are now focusing just to save the potential losses and to overcome the downfall faced by them.

Jobs & Appraisals

Nevertheless the above, the pain becomes more painful when it starts to pinch the general masses. In such critical time, it is important to hold on to the key builders of businesses i.e. the employees to support the businesses to revive back. . The cash crunch has put the employees and workers out of the annual appraisal limelight. While, it can be expected that appraisals are going to be minimal in the year 2017, job change is also not left as an option to the employees to get better hikes. The “startup industry” is on the verge of shutting down due to this cash crunch.

Even if the revenues are on a slight downfall for the time being, this does not in any way mean that no other appraisal tools are available! Companies should aim to find ways to engage the employees with them rather than focusing only on paying them off. It will result in more loyal, harder working employees. Making Employees a stakeholder in the Company’s growth will also motivate the Employees to work effectively and efficiently in order to enhance the profitability of the business.

DEMONETISATION… not Demotivation!

Go Cashless with ESOPs

When the entire country is getting cashless, why to stay behind for appraisals!! Effective appraisal tools in the form of Equity Incentives are very much prevalent across industry. Employee Stock Option Plans, popularly known as ESOPs wherein the equity of the company is shared with the employees is gaining acceptance as well as attention in the market as an alternate to cash compensation. Over the years, ESOP has gained worldwide recognition and is now a most attractive tool for employee reward and retention.

Companies are keen to adopt this strategy over vanilla increments. While cash has always been a short term motivator, ESOPs are a dual benefit strategy for both employees as well as the owners. Equity-based incentive plans create a sense of belongingness among Employees as they get directly linked with the growth of the Organization. It makes the Employees think and work as an intra-preneur & motivate them to work effectively and efficiently in order to enhance the profitability of the business.

Equity linked incentives gain all the more significance in the present cash crunched country. Under the present scenario, ESOPs can be prove to be real savior and can rescue both for the corporates who are cash-short and for their staff who is expecting the usual annual appraisals. Stock Option Plans are cashless compensation strategies which act as catalyst for employee behavior, thereby creating successful teams through shared goals. Sharing in equity will not only save the cash outflow from the company but at the same time add value to it by aligning the interests of the employees to the interest of the business and the company. In fact, employees will be paying cash to the company in order to acquire shares under ESOPs thereby generating funds for the company. Companies are extensively focusing on providing various kinds of benefits to their employees over and above the fixed salary. In such a scenario, ESOP can prove to be a carrot, which can be diligently used to reward the employees without cash outflow, and make them a partner in Companys’ growth.


Although the demonetisation policy is facing a lot of criticism however soon we are going to experience much positive effects of this program. It is going to improvise India’s economic and fiscal conditions in the long run. In the meantime we have in place appropriate tools that enable corporates to plan the annual appraisals for their employees by means of offering them equity based incentives i.e. ESOPs. Corporate houses that are implementing or propose to implement ESOPs in this demonetisation period includes names like Reliance Jio, Rolta India, Oracle Financial Service Software Ltd., Carborundum Universal Ltd. etc. The long-term growth potential of a business is directly proportional as to how well it is able to maintain a balance between satisfaction of its employees and preservation of its assets and financial resources. Shared values leads to Shared Success……

Wishing our readers a highly motivated, blissful and prosperous 2017!!

DEMONETISATION… not Demotivation!

ESOP Scenario in Singapore

ESOP Scenario in Singapore

The term ESOP i.e. Employee Stock Option Plans is prevalent worldwide. The concept is no more restricted to a particular country or continent. It originated way back in 1956 in the USA. The first step was taken by the pioneer of ESOP, Mr. Louis Orth Kelso and from that time till now the 50-plus years since then, ESOPs have become a popular alternative to empower employees, a sale or merger as a tool of business succession, and there are now more employee owned companies.

ESOPs started in Singapore in 1975 when Singapore Airlines adopted it. This was followed by Straits Steamship Limited in 1977. Although ESOPs are popular among MNCs, they were not widely received by the local listed companies until the late 1980s.

There are three employee share incentive plans commonly put in place by companies in Singapore, namely:

  • Employee Share Option Plan (“ESOP”): Where the employees can be granted the right but not an obligation, to purchase shares in the future at a pre-determined price, regardless of the fair market value of the shares at the time of grant.
  • Employee Share Awards Plan (“ESAP”): which allows companies to award employees actual shares, rather than options for free.
  • Phantom Share Option Plan (“PSOP”): a Plan wherein the employee gets the cash bonus relating to the increase in the stock value of the company over a specified period of time.

Like in India, in Singapore also the concept of ESOP is regulated by multiple Statues out there which includes the Singapore Companies Act, Listing manual of Stock Exchanges of Singapore, taxation laws of Singapore etc.  Companies are required to obtain approval of Shareholders in a general meeting before adopting ESOPs. There is a requirement of obtaining shareholders’ approval in the general shareholder meeting before any company can adopt ESOPs. Under an ESOP, the options have a minimum vesting period of one-year and a maximum of five years to expiration.

ESOP Scenario in Singapore

There are certain restrictions with regard to ESOPs in Singapore for e.g.: employees who are substantial shareholders (with more than 5 percent share ownership of the company) are not allowed to participate in the plan. The number of shares that can be issued under each plan must not exceed five percent of the total issued share capital for mainboard-listed companies and must not exceed 15 percent for the smaller firms listed on the SES Dealing and Automated Quotation (SESDAQ) system. The number of shares issued to directors, chief executive officers, general managers, and officers of equivalent rank is restricted to 50 percent of the total number of available shares under the plan. The maximum entitlement of each participant is 25 percent of the total number of shares available in the ESOP.

However, all these restrictions, regulations and statutory obligation are associated with the ESOP plans that involves the equity shares of the company and not in case of cash-based incentive plans. As explained above, the name given to these kind of plans is Phantom Share/Stock Option Plans. Since there is no direct involvement or dealing in shares of the company, therefore these are not governed by the laws and rules.

We at are into catering all ESOP related needs covering the Legal, Taxation, Regulatory & Management support, thereby building & supporting the corporates with the right amount of remuneration for their employees.

Disclaimer: The data produced in this article has been fetched from publically available information & resources.

ESOP Scenario in Singapore

ESOP COST- An Allowable Expense

Employee Stock Option Plans, as a tool to reward & retain key human talent has gained enormous acceptance and adoption worldwide. Enterprises are more than ever interested in adopting non-traditional methods for making payments to their Employees. Hence ESOPs have become the most popular and accepted form of Employee Compensation.
Emergence of share-based payment as an important means of employee compensation has also generated heated debate on the manner of accounting for such payments. Accordingly the lawmakers have chalked down provisions dealing the same primarily under Guidance Note 18- issued by ICAI on Accounting for Employee Share-Based Payments, supported by relevant Sections under Income-tax Act, 1961. Certain judgments have also been given with regard of allowance of ESOP expenses.

In more concrete terms, ESOP expense is known as Compensation Cost. This is because, employee share-based payments generally involve grant of shares or stock options to the employees at a concessional price or a future cash payment based on the increase in the price of the shares from a specified level. The basic objective of such payments is to compensate employees for their services and/or to provide an incentive to the employees for remaining in the employment of the enterprise and for enhanced performance. Compensation Cost is the difference between the value of Company’s Share at the time of Grant and the price at which the Company has offered the Options to the Employee. This difference becomes the Cost to the Company.



Equity-settled Schemes:
In case of Schemes in which the Employee gets the Equity Shares of the Company against Exercise of Options, Compensation Cost is recognised by the Employer on a straight-line basis over the vesting period of the options. The entire expense is calculated at the time of Grant of Options and it is equally divided over a period within which the options will vest with the Employees, as the case may be.

Cash-settled Schemes:
In case of Schemes, where the Employee gets the incremental value of Company’s Shares over a period of time, the Employer has to make a provision equivalent to the amount to be paid to the Employees in the year in which the payment is to be made.



  • The Employer i.e. the Company for whose Employees the Scheme is being framed, shall book compensation cost in its books of accounts;
  • In case the scheme is framed by Holding Company, and it awards benefits to the Employees of its Subsidiary Company(s), then also the compensation cost will be booked by the Holding Company. However, the subsidiary will reimburse the holding company for such expense incurred by the holding company for the employees of the subsidiary company.

Compensation Cost is an allowable expense under Section 37 of the Income-tax Act, 1961. This is booked as an expense in the Profit & Loss account of the Company and is allowed as a deduction over the period of vesting of options on a straight-line basis.
In case of cash-settled schemes, the expense incurred upon payment of appreciation is booked as a provision in the books of accounts of the company in the year in which payment is to be made.
Let us understand the above-stated concepts with the help of an illustration:

  1. For Equity-settled Schemes
    Options Granted = 1000 FMV on Grant = Rs. 30/-
    Exercise Price = Rs. 10/- per option
    Compensation Cost = Rs. 20/- per option
    Vesting Period Options Vested Compensation Cost (in Rs.)
    100% at the end of 1st year from the date of grant 1000 options 1,000*(30-10) = 20,000

    Therefore, the total compensation cost of Rs. 20,000/- (1000*(30-10)), has to be booked in the year of vesting, by the company in its P&L A/c of the company.

  2. For Cash-settled Schemes
    Options Granted = 1000 FMV on Grant = Rs. 30/-
    Vesting Period Options Vested FMV on Redemption Provision to be made* (in Rs.)
    100% options at the end of 1st year from the date of grant 1000 options Rs. 50/- 1000*(50-30) = 20,000

* It is presumed that the payment of appreciation is being made in year of vesting.

In case of CIT vs. LEMON TREE HOTELS LTD, following the Madras High Court in CIT vs. PVP VENTURES LTD (TC(A) No. 1023 of 2005), it was held by Delhi High Court on 4th August, 2015, that expense incurred by the assessee on account of ESOPs is an allowable expense and hence this could be debited to the profit & loss account of the Assessee i.e. the Employer Company.
Also in another case of CIT(A) vs. PEOPLE INTERACTIVE INDIA PRIVATE LTD dated 21st October, 2015, the special bench has held that the discount under ESOP is in the nature of employee cost and hence is deductible during the vesting period w.r.t. to the market price of shares at the time of grant of options to the Employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvested /lapsed options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option.