The Tax Publishers

CLARIFICATION 7

Guidelines for governing special stock option scheme for Indian software companies linked with ADR/GDR offeringsSource : Press release, dt. 23-6-1998, issued by the Press Information Bureau, Government of India.

In his Budget speech 1998-99, the Finance Minister, Shri Yashwant Sinha announced a special stock option scheme for Indian software companies linked with ADR/GDR offerings by these companies as an instrument to enable these companies to provide incentives to retain their highly skilled professionals. The scheme would enable Indian software companies to offer terms comparable to the packages offered by international companies in the field.

The scheme would be governed by the following guidelines :

(i) A software company which has already floated ADR/GDR or a company which is proposing to float ADR/GDR would be entitled to issue ADR/GDR linked stock options to its employees.

A software company which proposes to issue GDR/ADR linked stock option to its employees should clearly include such proposal as part of its application for GDR/ADRs, while DEA approval will be for total issue size inclusive of stock option, the GDRs/ADRs earmarked for the employees upto the specified limit will be issued by the company as and when an employee exercises 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, such companies may seek permission for issue of stock options related to the existing GDR/ADR issue observing the general parameters of the guidelines.

(ii) The scheme would be available to listed and unlisted software Indian companies which fulfil the performance track record eligibility and other requirements under ADR/GDR guidelines.

(iii) A software company would be defined as a company engaged in manufacture or production of software where not less than 80 per cent of the companys turnover is from software activities.

The software company applying for issue of GDR/ADR linked stock options shall be required to submit relevant documents certified by a Chartered Accountant, establishing that they are a software company conforming to the stipulation indicated above. The relevant documents shall also be submitted to RBI while applying for permission of foreign currency for acquisition of GDRs/ADRs in exercise of the stock option.

(iv) 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 the promoters and their relatives (as defined under the Companies Act).

(v) The general FERA permission for resident employees of software companies under the ADR/GDR linked Stock Option Scheme shall be granted by RBI. Requisite notification for this purpose will be issued by RBI. This would entitle resident employees to acquire and/or hold ADR/GDR linked stock option, acquire ADR/GDR on exercise of the option, remit funds upto 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 holding would need to repatriate the proceeds to India unless a general/specific permission from RBI is obtained for its retention or use abroad.

(vi) Issue of stock options shall require a special resolution as applicable for preferential allotment of shares. The allotment of stock options shall be done by a Committee of the Board of Directors of the company. The Committee of Directors shall have a minimum of two non-executive members of the Board as its members.

(vii) The issuing company would be entitled to issue options not exceeding 10 per cent of its issued and paid up equity capital.

(viii) The stock options may be issued at a discount of not more than 10 per cent to the market price at the time of the issue of the stock option.

(ix) While GDRs/ADRs acquired in exercise of the stock option shall be freely transferable, the stock options themselves shall be non-transferable.

(x) Full disclosure should 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.

(xi) ADRs/GDRs acquired on exercise of stock option would be eligible for confessional tax treatment under section 115AC of the Income Tax Act, 1961. Necessary amendment under section 115AC of the Income Tax Act, 1961 shall be notified by the Department of Revenue separately.

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