The concept of the Employee Stock Ownership Plan (ESOP) originated in San Francisco in 1956. It was designed to provide employees with the opportunity to become owners of a company in the event of the founders' passing.
Over the years, however, ESOPs have gained popularity as a means for employees, particularly in the technology industry, to share in the financial success of their companies. In addition to ESOPs, Restricted Stock Units (RSUs) have also emerged as another method for employees to have ownership in the company. Despite serving a similar purpose, ESOPs and RSUs are subject to different tax treatments.
As an Indian resident, it's crucial to have a good grasp of the various types of ESOPs that you may come across. ESOPs for Indian residents generally fall into four main categories: ESOPs offered by private Indian companies, ESOPs offered by publicly listed Indian companies, ESOPs offered by private foreign-based companies, and ESOPs offered by publicly listed foreign-based companies.
Regardless of whether the company is based in India or abroad, ESOP holdings of a private company can only be liquidated when the company either goes public (IPO), gets acquired, or conducts a share buyback.
For publicly listed companies, ESOPs/RSUs can be easily sold on the stock exchange and liquidated. It's commonly known that shares from an India-based company can be sold and reinvested, but it's not widely known that ESOPs/RSUs from a foreign public company can also be sold, and the proceeds reinvested abroad without the need to bring the funds back to India.
Regulations on reinvesting ESOP/RSU funds overseas
According to the updated Overseas Investment regulations published by the Ministry of Finance in 2022, shares obtained through Employee Stock Ownership Plans (ESOPs) and Restricted Stock Units (RSUs) are considered as Overseas Portfolio Investments if they make up less than 10 percent of the total equity of the company, which is usually the case. Further, the Reserve Bank of India's Liberalised Remittance Scheme allows for the reinvestment of Overseas Portfolio Investments in other publicly listed companies within 180 days of their sale. A combination of both of these now makes it possible to reinvest ESOP/RSU funds overseas.
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It has been confirmed by several prominent law firms in India that Indian residents with overseas ESOPs/RSUs in publicly listed companies can reinvest the proceeds from their sale in other listed stocks, provided the reinvestment occurs within 180 days of the sale.
Benefits of reinvesting your funds overseas
When considering reinvesting ESOP/RSU proceeds abroad, it's important to understand the benefits of such a decision. One key benefit is diversification. As the value of ESOPs grows, it's possible for a large portion of your wealth to become concentrated in the stock of one company. Diversifying your holdings into multiple companies or ETFs can help create a more resilient portfolio.
Another advantage is the ability to invest in the US market without incurring forex fees and Tax Collection at Source (TCS). If you own ESOPs in US-listed companies, you can easily transfer dollars from your ESOP account to a US brokerage account to invest in over 5,000 US stocks and ETFs. This means you won't need to pay any forex conversion fees or have funds blocked due to TCS as you wouldn't be transferring funds from India or converting currencies. Additionally, fast fund transfers are possible, and you can move funds into your US brokerage account quickly, via domestic Automated Clearing House (ACH) or wire transfers through a completely online process.
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In conclusion, ESOPs and RSUs can be the perfect fit in an employee’s portfolio as they play a crucial part in creating and managing wealth. The ability to reinvest these funds in other globally listed stocks now creates a unique chance for Indian residents who have foreign-listed ESOPs/RSUs to diversify their holdings and create a robust globally diversified portfolio.
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