ESOPs Under FEMA

The Two-Track Compliance Framework

Under Foreign Exchange Management (Non-debt Instruments) Rules, 2019, ESOP means ‘Employees’ Stock Option as defined under the Companies Act, 2013, and issued under the provisions of the Companies Act, 2013 and RBI regulations, as applicable.

The Two Regulatory Tracks

Track 1 — Indian company issuing ESOPs to non-resident employees falls under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules), read with the FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019. Provisions of section 62 of the Companies Act read with Companies (Share capital and Debentures) Rules, 2014. In case of listed Companies SEBI regulations also be applicable.

Track 2 — Overseas entity issuing ESOPs to Indian resident employees is governed by the, the Foreign Exchange Management (Overseas Investment) Rules, 2022 (OI Rules), the OI Regulations, 2022, and RBI guidelines.

Companies with international holding structures frequently carry obligations under both tracks simultaneously.

Track 1: Indian Company → Non-Resident Employees

When an Indian company issues ESOPs to a person resident outside India — foreign nationals, NRIs, OCIs, or group employees under a global ESOP scheme — the issuance qualifies as a foreign investment transaction under Schedule I of the NDI Rules. Reporting is staged across three events:

Form ESOP and FC-GPR are separate, independent obligations — one does not substitute for the other.

Pricing and Valuation

Issue price to a non-resident cannot be below:

• Listed company: Price as per SEBI’s ICDR Regulations
• Unlisted company: Fair value under an internationally accepted methodology (DCF, NAV, etc.), certified by a CA, SEBI-registered Merchant Banker, or practising Cost Accountant

The date of valuation with reference to which valuation certificate is obtained must not be more than 90 days old as on the date of allotment. Reusing a certificate prepared at scheme approval stage for subsequent allotment tranches is a pricing violation under FEMA, regardless of how recently the scheme was designed.

Track 2: Foreign Entity → Indian Resident Employees

What the OI Rules 2022 Changed

Prior to August 2022, Indian companies filed an annual Form ESOP with RBI for overseas ESOP grants to resident employees. Cashless exercises — RSUs and similar instruments involving no outward remittance — were exempt from reporting entirely under FED Master Direction No. 15/2015-16.

The OI Rules 2022 revised both:

1. Reclassification as OPI: Acquisitions of foreign entity shares by resident individuals under ESOPs (where holding is below 10% of the overseas entity’s equity) are now classified as Overseas Portfolio Investment (OPI) under Schedule III of the OI Rules. The reporting obligation rests with the Indian entity, filed through its AD Bank via Form OPI.

2. Half-yearly reporting: Form OPI is one single form introduced under OI Framework to be filed by Indian employer (India subsidiary or branch of foreign entity) . Form OPI is filed within 60 days of 31 March and 30 September. Where such investment qualifies as ODI, the resident individual concerned will need to report it in Form FC.

3. Cashless exemption eliminated: All ESOP exercises — cash and cashless — are now reportable. This is the most consequential and most frequently overlooked change in the current framework.

4. Reporting : Form OPI is one single form introduced under OI Framework.  When acquisition of shares under ESOP qualifies as OPI, Form OPI needs to be filed by the employer concerned.

LRS and Individual Compliance

Where ESOP exercise requires outward remittance, limits of Liberalised Remittance Shceme (LRS) will be applicable. Under LRS individual’s remittance limit per financial year is USD 250,000. Post-OI Rules 2022, the value of ESOP shares acquired — including cashless RSU allotments — counts toward the individual’s LRS utilisation for the financial year.

Compliance Checklist for CS Professionals