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Business News/ Politics / News/  Esop Tax: Govt issues valuation norms for options, but ambiguities remain
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Esop Tax: Govt issues valuation norms for options, but ambiguities remain

Esop Tax: Govt issues valuation norms for options, but ambiguities remain

The new norms would mean that firms such as Cognizant Technology Solutions which operate largely out of India, but are listed only in the US, are treated as unlisted firms.Premium

The new norms would mean that firms such as Cognizant Technology Solutions which operate largely out of India, but are listed only in the US, are treated as unlisted firms.

Clearing the air over the application of a tax on perquisites on employee stock options (Esops), the finance ministry on Tuesday issued guidelines for the same but a tax expert said that there was still some ambiguity over how options were to be valued.

Under the new norms, which become effective from 1 April, options of companies listed in India would be valued (this valuation is called the fair market value, or FMV) at the average of the opening and closing price of the underlying share on the date of vesting—the date when the employee effectively owns the share. This is usually a few years after the options have been issued by the company at a certain price of the underlying share called the issue price.

The new norms would mean that firms such as Cognizant Technology Solutions which operate largely out of India, but are listed only in the US, are treated as unlisted firms.

Unlisted companies and Indian companies listed overseas will need to have merchant bankers calculate FMV of the options on the date of vesting. The tax payable on these would be 33.9% of the difference between FMV and the price the employee pays for the options. This norm would also apply to the local subsidiaries of multinational firms where shares of the parent are issued under an option plan to employees of the local firm, according to Amitabh Singh, a partner in the tax practice of audit and consulting firm Ernst & Young. He said this could lead to some amount of ambiguity because “there are half-a-dozen ways of arriving at a valuation."

“Ideally speaking, they (the government) could have mentioned the method that ought to have been adopted for valuing unlisted shares," added Rajiv Anand, executive director, PricewaterhouseCoopers, an audit and consulting firm.

The government, however, has tried to resolve this ambiguity by saying that only Category I merchant bankers registered with stock market regulator Securities and Exchange Board of India can carry out the valuation of unlisted companies. Category I merchant bankers are the top tier of merchant bankers. Such firms are unlikely to deviate from popular and accepted valuation methods such as discounting future cash flows, said a tax practitioner, who did not wish to be identified.

The new norms would mean that companies such as Genpact Ltd, Sify Ltd and Cognizant Technology Solutions Ltd, which operate largely out of India but are listed only in the US, are treated as unlisted firms. The prices at which shares of such companies, and shares of multinationals such as IBM, trade in the exchanges where they are listed will have no bearing on the valuation of their stock options in India.

The guidelines also say that if a company’s shares are listed on more than one stock exchange, FMV would be the average of opening and closing price on the exchange which records the highest volumeof trading.

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Published: 24 Oct 2007, 12:19 AM IST
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