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The government today issued guidelines for software companies offering its employees special stock options linked with American and global depository receipts.

The scheme, designed to enable Indian software companies to offer terms comparable to those offered by international companies, was announced by Finance Minister Yashwant Sinha in his Budget speech.

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According to the guidelines, a software company, which has already floated or is proposing to float an ADR or a GDR issue would be entitled to offer its employees ADR or GDR linked stock options.

However, the company would be required to clearly include the stock options proposal in its application for floating an ADR or GDR issue.

Besides, a Department of Economic Affairs approval would be needed for the total issue size, inclusive of stock options.

The GDRs or ADRs, earmarked for the employees up to the specified limit, could then be issued by the company as and when an employee exercises the option.

The company would never be allowed to exceed the approved level of GDRs and ADRs to be issued.

If a software company has already issued GDRs or ADRs, it could seek permission for giving out stock options related to the existing GDR or ADR stock.

The scheme would be available to listed and unlisted Indian software companies, which fulfil the performance record needed for eligibility and other requirements under the ADR/GDR guidelines.

A software company would be defined as a company manufacturing or producing software, where not less than 80 per cent of the company's turnover is from software activities.

The software company, applying for issue of GDR/ADR linked stock options would be required to submit relevant documents certified by a chartered accountant, establishing that it is a software company, conforming to the stipulation.

The company would also have to submit the required documents to the Reserve Bank of India while applying for foreign currency needed to acquire the GDRs and ADRs in exercise of the stock option.

The stock options would be available to non-resident and resident permanent employees, including Indian and overseas working directors of the company.

The options would not be available to the promoters and their relatives as defined under the Companies Act.

The general Foreign Exchange Regulation Act permission for resident employees of software companies under the ADR or GDR linked stock option scheme will now be granted by the RBI. The RBI will issue notification for this purpose.

This would entitle resident employees to (i) acquire and/or hold ADR or GDR linked stock options; (ii) or acquire ADRs and GDRs on exercise of the option; (iii) remit funds up to a limit of $50,000 in a block of five years for acquisition of ADRs or GDRs and (iv) retain or continue holding ADRs or GDRs so acquired.

The resident employee, upon liquidation of ADR or GDR holdings would need to repatriate the proceeds to India unless a general/specific permission from RBI is obtained for its retention or use abroad.

Issue of stock options shall require a special resolution as applicable for preferential allotment of shares. The allotment of stock options will have to be done by a committee of the board of directors of the company.

The committee of directors would be required to have a minimum of two non-executive members of the board as its members.

The issuing company would be entitled to give options not exceeding 10 per cent of its issued and paid-up equity capital.

The stock options may be issued at a discount of not more than 10 per cent to the market price at the time of the issue of the stock option.

While GDRs/ADRs acquired in exercise of the stock option shall be freely transferable, the stock options themselves shall be non-transferable.

Full disclosure would have to be made in the director's report or in an annexure to the director's report of the details of the stock option scheme by the company.

ADRs or GDRs, acquired on exercise of stock options, would be eligible for concessional tax treatment under 115AC of the Income Tax Act, 1961. Necessary amendment under Section 115AC of the Income Tax Act, 1961, shall be notified by the Department of Revenue separately.

UNI

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