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January 2012
RBI check on risky deals - Clawback clause in private bank pay rules   MORE
ESOP idea spreads across corporate India   MORE
Metal, mining companies like Jindal Steel & Visa steel use ESOPs to retain senior management.   MORE
Facebook IPO sparks dreams of riches and adventure   MORE
Value of Golden parachute payments increased by 32% in past two years   MORE
ESOPs and Corporate taxation

The current tax laws do not provide for tax deduction for the ESOP costs companies charge to their Profit and Loss Account. So far companies were not impacted by this since many companies grant options at market price and under the Indian GAAP, there is no accounting hit for grants at market prices. With IFRS (adjusted to Indian conditions) gets implemented, companies will have to expense ESOPs using the Fair value method. This will mean market price grants will also require the fair value of the Options to be expensed in the books. This mandatory accounting charge will be significant and the hit will be harder if the expense is not tax deductible.
In this article we debate the need for enabling tax deduction for this charge. We also discuss how is this issue handled in the developed countries like US, where Fair value accounting has been mandatory for quite some time. Read to know more

Basis for calculating perquisite tax :
71% companies calculated perquisite tax as average of opening and closing market price on the stock exchange with the highest trading volume on the date of exercise whereas 22% calculated perquisite tax as the closing market price one day prior to the date of exercise.

Source : Equity Compensation Trends-2011, a survey by ESOP Direct

In this issue we discuss two terms which are relevant for a Plan of an unlisted company. Strategic sale, acquisition, buy out are very common in a business life cycle, especially in the case of startups, early stage or growth stage companies which are unlisted. The ESOP Plans in such cases need these provisions :

Tag along :
Here the employees are required to sell their holding (exercised and unexercised) in the company along with the Promoters / existing investors. They are expected to tag along with the investors to facilitate the deal.
Drag along :
Here the Promoters / existing investors are required to ensure that employee holding in the company (exercised and unexercised) is bundled up along with theirs while executing the deal. They are expected to drag the employee holdings along with them.

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