The Euro-issue guidelines have been accordingly modified by the government, to give effect to the budgetary announcement of finance minister Yashwant Sinha, who had promised a special stock-option scheme for software companies. The stock option is expected to be used as an instrument by these companies to retain highly skilled employees.

It is hoped that the guidelines announced by the finance ministry on Tuesday would prompt software companies to offer terms comparable with packages offered by international firms.

As per the scheme, a software company which has already floated or plans to float ADR/GDR shall be entitled to issue ADR/GDR-linked stock options to its employees. The issuing companywould be entitled to issue options not exceeding 10 per cent of its issued and paid-up capital. The stock options, as specified in the guidelines, can be issued at a discount of not more than 10 per cent to the market price at the time of their issue.

The company which proposes to issue ADR/GDR-linked stock option will need to include such proposals as part of its application for ADR/GDR. It was pointed out that while the department of economic affairs (DEA) approval would be for the total issue size, inclusive of the stock option, the GDRs/ADRs earmarked for employees up to the specified limit would be issued by the company as and when an employee exercised his stock option.

Accordingly, the company shall never exceed the approved level of GDRs/ADRs to be issued. In the case of software companies which have already issued GDRs/ADRs, they would have to seek permission for issue of stock options related to the existing GDR/ADR issue within the general parameters of the guidelines. The scheme will also beavailable to listed and unlisted local software firms which fulfill the performance track record criteria and other requirements under the ADR/GDR guidelines.

The stock options shall be available to non-resident and resident permanent employees (including Indian and overseas working directors) of the company. The stock options shall not be available to promoters and their relatives as defined under the Companies Act.

Under the scheme, a software company has been defined as one which is engaged in the manufacture or production of software where not less than 80 per cent of the company's turnover is from software activities.

The company applying for such stock options will be required to submit documents certified by a chartered accountant, establishing that it isa software company confirming to the stipulations. Also relevant documents will have to be submitted to the RBI while applying for permission of foreign currency for acquisition of GDRs/ADRs in exercise of the stock option.

The guidelines alsostipulate that general FERA permission for resident employees of software companies under the ADR/GDR linked stock option scheme shall be granted by the Reserve Bank. Requisite notification for this purpose will be issued by the Reserve Bank. This would entail resident employees to acquire and/or hold ADR/GDR linked stock option, acquire ADR/GDR on exercise of the option, remit funds up to a limit of $ 50,000 in a block of five years for acquisition of ADRs/GDRs and to retain or continue holding ADRs/GDRs so acquired.

The resident employee upon liquidation of ADR/GDR holdings would need to repatriate the proceeds to India unless a general/specific permission from RBI is obtained for its retention or use abroad.

It has been further stipulated that issue of stock options shall require a special resolution as applicable for preferential allotment ofshares. The allotment shall be done by a committee comprising board of directors of the company. The committee shall have a minimum of two non-executive membersof the board as its members.

While GDRs/ADRs acquired in exercise of the stock option shall be freely transferable, the stock options themselves shall be non-transferable. Also full disclosure would be required to be made in the directors report or in an annexure to the directors report of the details of the stock option scheme by the company.

The guidelines also specify that ADRs/GDRs acquired on exercise of stock option would be eligible for concessional tax treatment under 115AC of Income Tax Act. Necessary amendments in this regard shall be notified by the department of revenue shortly.

Insight

Employee stock options are fast becoming a popular option for employers as they can easily be availed of by forming a trust and holding shares on behalf of the employee. The biggest advantage of the proposed scheme is that any rupee depreciation will result in major benefits.

At present, Section 115 AC deals with the income of NRIs and the tax rate applicable for long-term capital gains, forspecified categories of bonds/shares/convertibles, which is 10 per cent against the normal rate of 20 per cent. The proposed amendment should also provide for the benefit of indexation. If implemented, this will be another major benefit for employees.