Esop FBT for unlisted cos on Sebi rules

NEW DELHI: The fringe benefit tax (FBT) on unlisted companies granting stock options to their employees is likely to be based on Sebi norms for valuation of shares in unlisted firms or the commonly accepted Wealth Tax rules.

In the 2007-08 Budget, the government has proposed levying FBT on the discount price of Esops. The discount price is the difference between the fair market value on the date when the employee exercises his stock option and the amount actually paid or recovered from the employee.

For instance, a listed company that allots shares to its employee under a stock option plan at, say, Rs 100, compared to the quoted value of Rs 1,200, will be liable to pay an FBT of 33.99% on Rs 1,100. The tax burden works out to close to Rs 374.

The valuation norms are well laid out for listed companies. But in the case of unlisted companies, the finance ministry will unveil norms separately. Two options are now being looked at. In both cases, the book value is the basis on which the share valuation is done.

Sebi rules relating to valuation of shares in unlisted firms say the computation should be based on the net worth per share divided by the number of paid-up shares. A similar computation is also done under the Wealth Tax rules. The new levy announced in this year’s Budget may prompt many companies to nudge their employees to exercise their stock options by March 31, ‘07, since the new provision kicks in from April 1.

In a stock option plan, the options are first granted to the employee. These vest with the employee for a period, say, four years. During this vesting period, the employee cannot transfer or sell the options. Once this period is over, the employee acquires the shares by exercising the option. After that, the choice is left to him to sell or hold the shares.