Indian overseas investment rules permit foreign companies to issue stock options under its ESOP schemes to employees or directors of their Indian offices (“Foreign Options”) provided that (i) the Foreign Options are offered globally on a uniform basis; (ii) the Indian office files an annual return with details of exercise of the Foreign Options by Indian employees; and (iii) amounts payable on sale of any shares held pursuant to exercise of Foreign Options by Indian employees are repatriated to India within 90 days

2) ESOP’s can be issued directly or through an employee welfare or ESOP trust.

Best option is to issue stock directly to employees. Under Foreign Exchange Management (Overseas Investment) Rules 2022 there is no such arrangement for routing the  stock through trust Indian Company.

RSUs involve transferring units upfront to the employees, with a provision of reverse vesting. In the event an employee quits his employment, the issued units revert to the employers. The Companies Act does not envisage any procedure for issuance of RSUs separately, but states that options issued to employees who resign shall expire or shall be exercised by the employee in terms of the ESOP scheme

Stock options can be issued by foreign company to independent contractor 

Any Indian company can offer shares only to its employees under a scheme employees' stock option under Section 62 (b) of the Act, such arrangement is not available to foreign company. 

Dear Client,

As the Indian company is a third party vendor and not a subsidiary, the best way forward would be a direct issuance (Option 3) to the contract resources. However, FEMA regulation compliance (i.e., the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019) is required. An RBI approval would also be needed if such issuance does not come under the automatic route. The establishment of a trust (Option 2) is another viable choice but is more demanding with respect to regulatory compliance of SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. The documentation should comprehensively detail out the vesting period, implications for taxation under Indian Income Tax laws (capital gains and perquisite taxation onto ESOPs), as well as compliance with US securities laws.

Hope this clarifies everything. Feel free to reach out for any further legal query.

Since the issuance of ESOPs by a foreign company to employees residing in India at its Indian subsidiary involves the distribution of foreign securities, it qualifies as a capital account transaction, it is therefore subject to the FEMA and the rules and regulations issued thereunder.

Share-based benefits are increasingly recognized as vital instruments for attracting and retaining talent, leading many companies to explore diverse structures for their implementation. Notably, foreign companies are actively issuing share-based benefits to Indian employees, while many Indian firms are also issuing ESOPs to their foreign workforce.

The OI Rules allow foreign entities to grant ESOPs to resident Indian employees, subject to the following conditions:

(a)   the individuals are employees or directors of the Indian office, branch, or subsidiary of the foreign entity, or of an Indian entity in which the foreign entity holds direct or indirect equity interests; and

(b)  the ESOPs must be offered by the issuing foreign entity “globally on a uniform basis”

There is no specific guidance on the interpretation of “globally on a uniform basis” the intent of this rule suggests that it should be a comprehensive global scheme applied uniformly across all jurisdictions where the issuing foreign entity and its affiliates operate.

A recent development has brought the granting of ESOPs by Indian companies to foreign nationals from countries sharing land borders with India under regulatory scrutiny. The Government issued Press Note 3, which amended the FDI policy to mitigate the risk of “opportunistic takeovers or acquisitions of Indian companies” during the period of market turbulence caused by the COVID-19 pandemic. According to Press Note 3, “an entity of a country that shares a land border with India, or where the beneficial owner of an investment into India is situated or is a citizen of such a country, may invest only under the government route.” Regulatory authorities appear concerned that ESOPs could potentially be utilized to circumvent these restrictions. 

a U.S. incorporated company can grant stock options to a consultant or contractor living in India,

2) The company should have a formal stock option plan that outlines the terms and conditions of the options being granted.

3) obtain RBI approval 

Subject to the compliance of the RBI/FEMA regulations, the stock options can be issued to consultant contractors.

FCRA operates in different field. It regulates acceptance and utilization of foreign contribution by individuals, association or companies in India. It has no application to your case. 

Since the Indian company is a third-party vendor and not a subsidiary or affiliate of the US company, the issuance of stock options to the Indian resources requires careful structuring to comply with Indian foreign exchange laws (FEMA), tax regulations, and SEBI guidelines. Here are the possible approaches:

1. Direct Issuance to Contract Resources (Best Option)

• The US company can directly grant stock options to Indian contract resources under an ESOP (Employee Stock Option Plan) or RSU (Restricted Stock Unit) plan.
• Since these resources are not employees of the US company, the options can be structured as a consultant stock option plan rather than a traditional ESOP.
• Compliance with RBI’s Liberalized Remittance Scheme (LRS) would be required if the Indian individuals need to remit funds to exercise the options.
• The Indian recipients would be subject to capital gains tax upon sale and income tax on vesting/exercise, depending on plan structure.

2. Creating a Trust in India (Complex but Feasible)

• A trust can be established in India to hold the stock options on behalf of the Indian contract resources.
• The trust would act as a facilitator, and resources would be designated as beneficiaries.
• This structure ensures ease of administration but requires compliance with SEBI (SBEB Regulations), FEMA, and tax laws.
• The trust structure could also raise questions on deemed control and transfer pricing if not structured properly.

3. Issuance Through the Indian Company (Not Feasible)

• The Indian company is not a subsidiary or affiliate, so issuing stock options through the Indian company is not permissible under Indian law.
• The Indian company cannot receive shares on behalf of employees unless it is an affiliate, as this would violate FEMA and SEBI rules on foreign securities.
• If structured as a benefit or bonus, it may create taxation and legal hurdles for both companies.

4. Alternative Approach – Phantom Stock

• If direct stock issuance is complex, the US company may issue phantom stock units or stock appreciation rights (SARs) to Indian resources.
• These mimic stock value appreciation but do not involve actual share transfer, avoiding FEMA and SEBI restrictions.
• The payout can be structured as a bonus or performance-based incentive.

Key Legal & Compliance Considerations

• 
  FEMA Compliance: Direct issuance is permitted under Liberalized Remittance Scheme (LRS) but requires RBI compliance.
• 
  Taxation in India: Tax implications on vesting, exercise, and sale should be evaluated.
• 
  SEBI Guidelines: If issuing through a trust, SEBI (SBEB) Regulations, 2021 must be followed.
• 
  Employment Laws: Since the resources are not direct employees, structuring as an ESOP must be carefully done to avoid misclassification risks.

Conclusion

The best approach is direct issuance to contract resources (Option 1), ensuring compliance with FEMA and taxation laws. If direct issuance is not feasible, phantom stock or SARs (Option 4) can be considered to avoid FEMA-related issues. Creating a trust in India (Option 2) is possible but adds complexity, while routing through the Indian company(Option 3) is not legally viable.

Thanks and Regards,
Advocate Aman Verma
Legal Corridor

Since the Indian company is not a subsidiary or affiliate of the US company and is only a third-party vendor, issuing stock options to its contractors raises compliance concerns under FEMA, RBI regulations, and FCRA.

Best Option: Direct Issuance to Contractors

• The Foreign Exchange Management (Overseas Investment) Rules, 2022 allow ESOPs/RSUs to be granted only to employees or directors of an Indian subsidiary, branch, or joint venture of the foreign company.
• Since these contractors are not employees of the US company, FEMA compliance becomes complex.

Alternatives & Compliance Considerations

Option 1: Direct Issuance to Contractors (With FEMA/RBI Approval)

• 
  Process: US company can issue ESOPs/RSUs directly to Indian contractors under Liberalized Remittance Scheme (LRS), but:

  • RBI permission may be required as they are not direct employees.
  • The contractors must report foreign assets in their Income Tax Return (ITR).
  • 
    Perquisite Tax at exercise + Capital Gains Tax at sale.

• 
  Challenge: The RBI may reject the issuance since contractors are not direct employees.

Option 2: Trust Route in India

• A trust in India can hold stock options for the contractors as beneficiaries.
• The trust needs RBI approval under FEMA for holding foreign shares.
• 
  Challenge: Additional legal complexity & tax compliance for trust structure.

Option 3: Issue to the Indian Company for Further Distribution

• 
  Not feasible, as the Indian company is a third-party vendor and not an affiliate.
• FEMA does not permit transfer of foreign ESOPs through an unrelated Indian entity.

FCRA Consideration

• Stock options are a "foreign security," not a foreign contribution.
• However, if structured as a monetary benefit, it could fall under FCRA scrutiny.
• If issued directly under FEMA-compliant stock option plans, FCRA should not apply.

Final Recommendation

1. 
   Direct issuance under LRS with RBI compliance is the best option, but approval may be required.
2. 
   Consult an RBI and FEMA expert to ensure legal compliance.
3. 
   Ensure tax compliance for recipients (perquisite & capital gains tax).

For detailed, personalized advice, consider a phone consultancy. Hope you find the information helpful. You are free to contact me for further discussion. If you could spare two minutes of your time to write a review, it would be greatly appreciated and bring immense happiness to read it. Thank you. Shubham Goyal.

Yes it can be done by taking permission if rbi if required also abide fema and fera regulations