26 Dec 2023
This update discusses some key challenges arising under the new overseas investment regime in India when providing exits or implementing earn-out structures for Indian residents holding employee stock options in foreign companies.
There has been a marked growth in cross-border business frameworks in recent years, with Indian businesses, both old and new, exerting their presence in offshore markets and vice versa. Foreign entities with wholly owned subsidiaries in India have increasingly started to grant remunerative incentives to their employees in such Indian subsidiaries through restricted stock units or employee stock options (ESOP), with the Indian foreign exchange regulator, the Reserve Bank of India (RBI), making specific allowances for the same through legislative changes over the course of the last few years. This allows for foreign entities to implement an ESOP plan on a globally uniform basis for all its multinational subsidiaries and permits Indian employees of such subsidiaries to enjoy the benefits of the appreciation of equity value of the employer parent entity abroad. However, there has been some ambiguity with respect to the implementation of global acquisition scenarios, wherein a foreign entity with Indian ESOP shareholders (being employees of such foreign entities in India) is acquired by another foreign entity through a share transfer process, merger or restructuring of similar nature.
The acquisition of equity by Indian residents in entities abroad is governed by the Foreign Exchange Management Act, 1999, Foreign Exchange Management (Overseas Investment) Regulations 2022, and Foreign Exchange Management (Overseas Investment) Rules, 2022 thereunder, along with supplementary notifications and circulars issued by RBI from time to time (collectively, the FEMA OI Regulations).
Under the FEMA OI Regulations, the acquisition of capital stock of a foreign company through:
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