How to issue ESOPs to your Indian team

India is home to a vast pool of talented professionals, making it a top destination for startups looking to expand their teams. However, building and managing a workforce in India comes with its fair share of challenges—especially when it comes to offering stock options (ESOPs). If you’re considering this for your Indian team, it’s essential to understand the process, its complexities, and how to streamline it effectively.

Simplifying Stock Options for Indian Employees

Offering stock options to your Indian team starts with creating a global ESOP policy that includes provisions for international employees. Choosing the right type of stock options is critical. Here are the most common options:

• Non-Qualified Stock Options (NSOs): A popular choice, these allow employees to own shares in the company.
• Stock Appreciation Rights (SARs) or Phantom Stocks: Best suited for cash payouts, these options give employees the benefit of stock value appreciation without granting ownership.
• Restricted Stock Units (RSUs): While these provide free shares, they come with higher compliance costs and are often better for larger companies or listed firms.

Getting this right ensures you’re offering competitive benefits while staying compliant with local laws.

Managing Tax and Compliance Complexities

Issuing stock options to Indian employees involves several tax and compliance requirements. Some key points to keep in mind include:

• Valuation of Stock Options: Each financial year (April to March in India), you’ll need to calculate the fair value of vested options, even if they aren’t exercised.
• Transfer Pricing: The value of these options is part of your cost structure and must be accounted for when billing your parent entity.
• Withholding Tax on Cash Payouts: Any payouts need to go through the local subsidiary, as direct payments to employees can lead to tax complications.

These steps ensure compliance with Indian tax laws and prevent potential penalties or tax demands.

Staying Compliant with FEMA Regulations

When offering stock options in India, it’s crucial to follow the simplified guidelines under the Foreign Exchange Management Act (FEMA). While the rules are less complex than before, there are still reporting requirements that must be met to avoid any legal hiccups.

The Smart Solution: Partnering with an EOR

If this sounds overwhelming, there’s a simpler way to navigate these challenges—partnering with an Employer of Record (EOR). An EOR handles the complexities of managing your Indian team, including:

• Drafting and implementing compliant ESOP policies.
• Managing tax calculations, deductions, and filings.
• Ensuring compliance with FEMA and other local regulations.
• Handling payouts and transfer pricing seamlessly.

By working with an EOR, you can focus on growing your business while they take care of the operational and legal details, making your expansion to India hassle-free.

Want to dive deeper? Check out our YouTube video for an in-depth look at how to issue ESOPs to your Indian team, including the pros and cons of different equity types and how to stay compliant.