Summary: This blog discusses the conceptual and regulatory framework governing employee stock options (ESOPs) in India in the context of ‘reverse-flips’, i.e., cross-border mergers and inbound restructurings, where incentives provide beneficiaries with an ownership right in the issuer company. It also explores certain practical aspects that are to be considered by Indian companies while designing and operating such incentive schemes post-merger.
“Reverse flips” are merger transactions whereby companies incorporated outside their home country relocate their headquarters back to the home country. Such transactions are also referred to as inbound mergers, as the surviving entity post-merger is registered in the home country. In the Indian context, a reverse flip merger involves a company incorporated outside India (“ForeignCo”) merging into an unlisted company incorporated in India (“IndiaCo”), typically a subsidiary. As part of the transaction, shareholders of the ForeignCo would receive shares of the IndiaCo.
One of the critical issues that is observed in reverse flip mergers involving Indian companies relates to the treatment of employee stock options (“ESOPs”), largely due to the regulatory framework in India[1].
In India, ESOPs remain a widely used deferred compensation strategy. They serve as an effective tool to attract, incentivise and retain talent by offering employees an opportunity to purchase company shares at a future date, subject to specific conditions, typically linked to tenure or performance milestones.
The issuance of ESOPs by unlisted companies is governed by the Companies Act, 2013 (“Act”), read with the rules (“SCD Rules”). Listed companies are required to comply with the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“SBEB Regulations”), for the issuance of share-based incentives, including ESOPs. Furthermore, where an IndiaCo grants ESOPs to non-residents, foreign exchange regulations will also have to be complied with.
Permitted Grants under Indian Laws & in Reverse Flip Mergers
Incentives granted by the ForeignCo, prior to the merger, may be exercised or migrated to an equivalent incentive scheme in the IndiaCo, subject to their continuity being permissible under Indian laws. If migration is not possible and an exercise is not contemplated, incentives at the ForeignCo will have to lapse or be cancelled, prior to completion of the merger.
Given the regulatory framework governing ESOPs in India, the IndiaCo must assess continuity of incentives provided by the ForeignCo under the local incentive scheme, after the merger. The Act allows unlisted companies to grant ESOPs to permanent employees of the company (in India or abroad) and certain types of directors[2]. Indian companies are permitted to grant ESOPs to employees and directors of holding companies and subsidiaries (until unlisted[3]) and to other entities in the group, including associate companies (once listed[4]), subject to the restrictions below.
‘Employees’ who are ‘promoters’ (founders/ individuals in control of the company), members of the ‘promoter group’ and independent directors or directors who, directly or indirectly, hold more than 10% of the outstanding equity of the company are not eligible[5], unless the company is a start-up[6] (in which case, ESOPs can be granted to these individuals within a prescribed time).
Accordingly, consultants, promoters/ members of the promoter group, advisors, contractors, independent directors and group company employees (not part of holding or subsidiary companies), are not eligible for ESOP grants by an unlisted IndiaCo. Therefore, a pertinent question is whether individuals awarded share-based incentives by a ForeignCo, under its incentive scheme, qualify as “employees” under Indian law for grant of ESOPs by the IndiaCo.
If beneficiaries of a foreign incentive scheme cannot receive ESOPs of the IndiaCo post-merger, they would be at a disadvantage, as they would lose benefits previously granted to them due to a corporate restructuring beyond their control. Where individuals (commonly consultants and advisors) do not fall within the purview of “employees” under Indian law, alternative solutions will have to be explored. For instance, subject to the incentive scheme and applicable laws, the ForeignCo may consider accelerating the vesting of incentives before the merger or providing a cash pay-out in lieu of the incentives. Separately, the IndiaCo must be cautious about potential tax implications that may arise from the merger, for beneficiaries holding incentives granted by the ForeignCo. Under Indian tax laws, the treatment of stock options may differ, depending on the nature of employment and structure of the grant. If these individuals are not classified as “employees” post-merger, they may face different tax obligations, such as higher taxation at the time of exercise or sale. To address this, the IndiaCo must conduct a thorough review of the tax implications and, where necessary, consult with tax advisors to ensure that individuals are not subjected to undue tax burdens, as a result of the merger.
Vesting and Exercise Conditions Post-Merger
Where beneficiaries of incentive schemes of the ForeignCo can be granted ESOPs by the IndiaCo after the merger, the IndiaCo will have to evaluate whether it can accommodate these grants within its existing ESOP scheme(s), i.e., an assessment of terms of the original grant(s) against the backdrop of ESOP scheme(s) adopted by the IndiaCo and applicable regulations. If the foreign incentive scheme includes clauses or benefits not compliant with Indian law, the IndiaCo would need to make modifications or offer alternatives to ensure consistency with local regulations, while preserving benefits that are to accrue or have accrued previously.
ESOPs issued by an IndiaCo are subject to a mandatory minimum vesting period of one year from the date of grant[7] (the only exception being immediate vesting of ESOPs granted, upon death or permanent incapacitation of the ESOP holder[8]), which may create a discontinuity for individuals transitioning from the ForeignCo’s incentive scheme to the IndiaCo’s ESOP scheme.
Interestingly, for grant of ESOPs to beneficiaries of the transferor company in a domestic merger scenario, Indian laws provide for a carve-out, which states the following:
“In a case where options are granted by a company under its Employee Stock Option Scheme in lieu of options held by the same person under an Employee Stock Option Scheme in another company, which has merged or amalgamated with the first-mentioned company, the period during which the options granted by the merging or amalgamating company were held by him shall be adjusted against the minimum vesting period required under this clause.”[9]
While a literal interpretation suggests that this carve-out applies only to domestic mergers, market practice indicates that Indian regulators have extended this relaxation to cross-border mergers as well.
Exercise Price for ESOPs
Under Indian laws, there is no legally mandated exercise price for ESOPs, i.e., companies have discretion to determine the exercise price[10]. From a regulatory perspective, Indian companies are prohibited from issuing equity shares at a discount to their face value[11] (except in the case of sweat equity shares, which are separately regulated[12]). Thus, if the exercise price of ESOPs to be granted by the IndiaCo is lower than the face value of its equity shares, the difference (i.e., equivalent to the face value of equity shares at the time of issuance) must be funded.
It is common for foreign companies to set their exercise price at nil consideration. Therefore, when undertaking a reverse flip merger, it is critical to assess whether the IndiaCo is required to maintain a “nil consideration” exercise price for ESOPs to be granted pursuant to the merger, and to evaluate the potential exercise price of ESOPs to be granted by the IndiaCo. The IndiaCo must evaluate structures to ensure that beneficiaries holding/ receiving incentives from the ForeignCo are not subjected to any additional financial burden because of the merger, on account of exercise price of ESOPs to be granted by the IndiaCo.
Conclusion
In recent years, several companies have relocated their ownership structures into India due to strategic factors; including pursuing an IPO in the India market, taking advantage of more robust intellectual property protections, for tax reasons, etc. However, as ESOPs have become a key retention tool and a part of modern-day remuneration, when such benefits are migrated from jurisdictions that are comparatively less regulated than India (in relation to such benefits), continuity of such benefits to the fullest extent possible becomes a key consideration.
If certain benefits cannot be migrated due to applicable Indian laws, the beneficiary may lose such benefits, which would be inherently unfair to the individual (especially if the beneficiary in question did not have any role/ say in the merger). Thus, it is imperative that, to the extent commercially viable, companies make share-based benefits a key consideration upfront so that they can smoothly carry out the migration, cancellation, replacement, acceleration, etc., of these benefits as required.
For further information, please contact:
Bharath Reddy, Partner, Cyril Amarchand Mangaldas
bharath.reddy@cyrilshroff.com
[1] Cross-Border Reverse Flip Mergers and Their Impact on Share-Based Incentives in India (accessible at, https://practiceguides.chambers.com/practice-guides/employee-incentives-2025/india/trends-and-developments/O20084)
[2] Rule 12(1) of the SCD Rules.
[3] Rule 12(1) of the SCD Rules.
[4] Regulation 2(1)(i) of the SBEB & SE Regulations.
[5] Rule 12(1) of the SCD Rules.
[6] Companies (Share Capital and Debentures) Third Amendment Rules, 2016 (accessible at https://www.mca.gov.in/Ministry/pdf/Rules_19072016.pdf/)
[7] Rule 12(6)(a) of the SCD Rules.
[8] Rule 12(8)(d) of the SCD Rules and Regulation 18(1) of the SBEB & SE Regulations.
[9] Rule 12(6)(a) of the SCD Rules.
[10] Rule 12(3) of the SCD Rules.
[11] Section 53 of the Act.
[12] Section 54 of the Act read with Rule 8 of the SCD Rules.
