FinMin's new ESOP valuation rules throw up many queries

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The Finance Ministry has come out with rules for valuation of Employee Stock Options . They could hit infotech and media companies hard if they do not, or cannot recover the tax from employees. Here are some more details on this issue.

 

This is definitely not a big impact at all on any company as most companies have an inbuilt clause that they will recover this from employees. So it's unlikely that any company is likely to take any hit. If at all, the hit will be taken by the employees who will have to pay this FBT (Fringe Benefit Tax) from their own pocket. 

 

However there are a few issues cropping up. Whatever issues are cropping up are actually cropping in terms of overseas listed company or private Indian unlisted company, none in terms of Indian listed companies.

 

For e.g. in terms of overseas listed companies, whether the ESOP FBT valuation guidelines actually apply to companies listed overseas, in that case what would be the method of valuation if they do apply. Will you apply the valuation of the overseas stock price or will you apply the valuation of a category one merchant banker? It's very unclear.

 

In terms of Indian companies that are listed overseas but not listed in India, for e.g. Genpact, what do you do? Does the FBT guideline apply to them? If yes, what again is the valuation? The valuation in the US markets or a category one merchant banker valuation? This again is very unclear.

 

In terms of private unlisted Indian companies, a category one merchant banker valuation is valid only for six months. So will these companies have to go in for valuation every six months, especially if the IPO is after two-three years?

 

So lot of question been thrown up, but none in terms of Indian listed companies. In that case it's very clear as fair market value is average of opening and closing price as on date. So will employees have to pay the difference of the fair market value and the price that they pay to get their option stock.