When I founded TV18 in the early 90s, we had given generous stock options to our critical team members. In that sense, we belonged to a clutch of ESOP pioneers in India. And since we were leaders in business news, we also drilled hard into issues around entrepreneurship, taxation and union budgets.
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[00:00:00] Rise Above The Din, Unbox the News With Me, Raghav Behal
[00:00:04] You know India taxes ESOPs that employees stock options harshly
[00:00:10] In fact I would say very harshly
[00:00:13] Let me give you a quick history lesson
[00:00:15] You know when I founded TV 18 in the early 90s
[00:00:19] We had at that point in time given what I would call fairly generous stock options to our critical team members
[00:00:27] Now in that sense we belonged to a clutch of ESOP pioneers in India
[00:00:32] And since we were leaders in business news
[00:00:36] We also had to drill down into issues around entrepreneurship, taxation and union budgets
[00:00:44] Now I'll cut to that very stateful union budget of 2007
[00:00:49] Now in that the aggressive Mr. Pichidambaram, the Finance Minister then had unveiled
[00:00:54] What I can only call a very shocking model of ESOP taxation
[00:01:00] Let me explain with a very simple example
[00:01:04] Now imagine a stock or a share whose fair market value is let's say 100 rupees
[00:01:11] Now to incentivize a key employee
[00:01:13] Assume that she is given a grant of 1 million options at 10 rupees
[00:01:20] Now this clearly because of the 90 rupee difference will give her a potential
[00:01:25] Not this word, potential income of 90 million or 9 crore rupees
[00:01:31] You know I call it potential because it's not yet a real or a realized income
[00:01:36] Because obviously no actual shares have yet come into her possession
[00:01:41] Now assume further that she has two years, let's say two years to tell the company
[00:01:46] Whether she is accepting the grant or she's not accepting it
[00:01:50] Now this two year thing is called the exercise period
[00:01:54] The minute she says yes I want the grant
[00:01:57] She has what's technically called exercised it
[00:02:01] But note, note a very vital fact that it could take several more weeks
[00:02:07] Even months actually of fairly complicated regulatory steps
[00:02:11] For her to actually own these shares after she has said yes
[00:02:17] Now this is where the trouble started
[00:02:21] Mr. Pichidambaram said she should pay the tax immediately upon the exercise
[00:02:26] But as I've just told you there's a problem
[00:02:30] She has yet to get the shares
[00:02:32] All the so called gains are notional, they're on paper
[00:02:36] So how and why should she pay a tax on an illusory as yet non-existent income
[00:02:44] Now worse, imagine that she gets the shares in three months
[00:02:49] But something adverse has happened in that hiatus, in that interim period
[00:02:55] And say the value of each stock, each share has dropped to 5 rupees
[00:03:00] From the 90 rupees that she thought she was going to gain the 100 rupee price
[00:03:05] Now therefore see the very ridiculous situation that she will find herself in
[00:03:11] She would have paid tax on an income so called income of 9 crore or 90 million rupees
[00:03:18] Even though she has made a loss of 50 lakhs or 5 million rupees
[00:03:23] So you know what, the budget's logic was clearly absurd
[00:03:27] It flew in the face of every canon of taxation
[00:03:31] That is tax should be not levied on notional income
[00:03:36] Should never be levied on losses
[00:03:38] You know but that's how it happened and it happened only in India
[00:03:44] But now let's come to this year's budget
[00:03:46] Finance Minister Nirmala Sita Raman said that she had fixed
[00:03:49] The long festering E-SOP tax wound
[00:03:53] This is what she said
[00:04:23] For the employees who do not sell the shares immediately
[00:04:27] And continue to hold them for the same for long term
[00:04:32] In order to give a boost to the startup ecosystem
[00:04:36] I propose to ease the burden of taxation on the employees
[00:04:40] By deferring the tax payment by 5 years or till they leave the company
[00:04:46] Or when they sell their shares whichever is the earliest
[00:04:51] Now when she said this, Indian startups erupted in chairs
[00:04:55] Frankly, frankly we are a very strange country
[00:04:59] We applaud when a mistake that should not have happened in the first place
[00:05:04] When a mistake that is corrected after dozens of years of very exploitative
[00:05:09] Almost vicious implementation yet we applaud it
[00:05:11] Because in India an excruciatingly delayed correction
[00:05:16] Note my words excruciatingly delayed correction
[00:05:19] You know what we call it? We call it reform
[00:05:22] Anyway, the real drama and tragedy
[00:05:25] And this is almost like a you know a Garam Dharam Bollywood pot boiler
[00:05:29] It lay coiled in the fine print of what the Finance Minister said
[00:05:35] Because as usual, unwaveringly with deadly precision
[00:05:39] India's bureaucrats struck to neuter even this so called tiny reform
[00:05:46] Just see, just see what they did
[00:05:49] Now it's not a general policy applicable to all 20,000 or 20,000 plus odd startups
[00:05:55] No sir, it's restricted, hold your breath
[00:05:58] It's restricted to only about 250, only 250 of the few chosen
[00:06:05] By a committee of government secretaries who have ordained
[00:06:09] With sort of divine conviction that you know
[00:06:12] Come hither, you innovative free newbies
[00:06:15] You know you will enjoy these ESOP tax concessions
[00:06:20] And then there is an even sharper sting in the tail
[00:06:24] You know the perverse tax is not abolished
[00:06:27] It's only deferred by five years
[00:06:30] And if you leave the company, you lose the concession
[00:06:33] Now this with one stroke has will end up creating a rigid inflexible market for hiring talent
[00:06:41] So as I've said before, there they go again
[00:06:44] Micro-managing and tinkering with the free market of mobile talent
[00:06:50] And finally, why?
[00:06:52] Why is this concession not given to any ESOP holder?
[00:06:56] Why? You know, is the engineer for instance
[00:06:59] Who made Facebook apps work on geo feature phones
[00:07:03] Is he or she any less talented and creative?
[00:07:07] Why is he or she being denied this concession
[00:07:10] Just because he or she works in a large company
[00:07:13] Is talent going to be the determinant or the size of the employer's balance sheet?
[00:07:20] So what can I say in the end?
[00:07:23] I truly believe that Ms. Nirmala Sitaraman's quest was honest
[00:07:28] She really did want to correct an injustice
[00:07:32] But her bureaucrats simply torpedoed her noble intention
[00:07:38] So therefore, alas, ESOP
[00:07:42] ESOP continues to be a much abused acronym in India
[00:07:46] Frankly, as it stands today, it expands not to employee stock options
[00:07:51] But to an egregious state which is oppressing performers
[00:07:56] Thanks for listening
[00:07:57] Tune in next week for another episode of Raghav's Take