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Monday, November 19, 2007

New ESOP Valuation Opinion

ESOP Valuation Query by Mr. Alagar:

Everyone is aware of that the Income Tax Department has Implemented ESOP Valaution rules for FBT on ESOP. This rules is applicable for vesting of options on or after 1st April 2007. My query is 4500 options were granted in year 2002 and all those options are vested by the employees before April 2007, but those options not yet exercised, it may be exercised now ( I e after implementing valuation rules). So, if options are exercised now, then it is subject to the FBT as FBT on ESOP has been implemented w.e.f 1st April 2007 vide Finance Act, 2007 and tax liability is at the time of exercise of options. Now, my question is that how to arrive value of those 4500 options for purpose of FBT.
My understanding
Valuation rules for FBT on ESOP has been implemented w.e.f 1st April 2007 vide Notification dated 23-10-2007. According to this valuation rules, the category I Merchant Banker has to give valuation certificate as on date of vesting or any date earlier than the date of the vesting of the option, not being a date which is more than 180 days earlier than the date of the vesting. But, in this particular case the vesting is already taken place, so that I understand that this valuation rules shall not be applicable for those 4500 options. If this valaution rules is not applicable, How can we arrive value for those 4500 options.
please guide me.
Relevant rules can be found in

Mr. Sukamal & his Expert Opinion

Vesing date is relevant only for valuation of shares allotted under ESOP and not for deciding from when the rule 40C of Income Tax Rules will become applicable

With regard to the query regarding ESOP I like to share with you some points which I have learnt from this issue:

1. In case of ESOP, FBT comes into the picture only when the employee exercised the option vested since the employee derived the benefits from ESOP only when he exercised such option.

2.Clause (ba) of the Section 115WC(1) of the Income Tax Act (the Act) which provides for the value of fringe benefits in respect of equity shares allotted under any ESOP, is applicable w.e.f. 1-4-2008 i.e. from the assesment year 2008-09. Accordingly Rule 40C (which provides for guidelines for computing fair market value of the shares allotted under ESOP.....) is also applicable from the same assessment year.

3. Rule 40C is applicable in case the options (already vested) exercised from and after the year 07/08 in relation to the assessment year 08/09 and subsequent years. Hence, the option exercised in the year 07/08 is subjected to FBT in the assessment year 08/09.

4. For computation of FBT, one need to know the fair market value of the equity shares allotted under ESOP and there the vesting date becomes relevant which may be a day before 1st April, 2007.

5.Hence, the applicability of the Rules does not depend upon the vesting date whereas it depends upon the exercise date which should be in the year 07/08 and thereafter.

6. Further for listed company the rule clearly guides the valuation method where the merchant bankers certificate may not be required.

7. However for unlisted company the said valuation shall be done by a merchant banker in terms of rule 40C(1),(3) AND (4)(e).

8. In terms of Section 115WB(1)(d) and 115WC(1)(ba) the value of fringe benefits for shareallotted under ESOP is the fair market value of the shares allotted under ESOP as reduced by the price paid by the concerned employee.

9. Rule 40C provides for guidilenes for computing the fair market value of shares allotted under ESOP or sweat equity for listed company as well as unlisted company.

10. In your case it is not clear whether it is a listed company or unlisted company.

11. For listed company the guidelines for computing fair market value as provided in the above rules are very specific i.e. the average of the opening price and the closing price of the shares on the vesting date............................................ (please refer rule 40C(2)

12. For unlisted company, the valuation has to be done by a merchant banker applying any recognised valuation method as on specified date which may the vesting date or any day not later than 180 days prior to the vesting date (please refer rule 40C(3).

-- Regards
Sukamal Datta
Deputy Manager - Secretarial
Bombay Stock Exchange Limited
Mobile 9920018714


Alagar said...

Dear Sugumal,

I agree with your view, but again when vesting happened say in the year 2002 and which are outstanding for exercise for current year ( FY 2007-08, in this case we can not do backward valuation of shares for the year 2002 ( i e date of vesting) for a unlisted Company.

Only way is we can write to CBDT for applying the valaution rules both options vested on or after 1st April 2007 and those vested prior to April 2007 and due for exercise.

This is what my views.

See Yes Vj said...

This may be helpful,


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