Startups allowed to issue stock options to employees for up to 10 years from their incorporation

Startups: A notification was issued by the government on 8 June 2020 regarding the issuance of stock options to employees by new startup companies. The notification issued by the government on Monday mentioned that startup companies will be allowed to issue stock to their employees for a period 10 years from its incorporation as compared to the previous duration of 5 years.

The change was brought about by the Ministry of Corporate Affairs who brought about several improvements to the definition of a startup in the notification. According to the new notification, startup companies can issue equity of up to 15% of total share capital. The Ministry of Corporate Affairs has also removed the provision which requires that a listed company that has placed it’s debentures privately need to set aside reserves each year.

Startups allowed to issue stock options to employees:

This notification also amended the companies according to the share capital and debentures rule of 2014 which addressed the issue regarding the definition of a startup.

In February of 2019, the DPIIT also extended the period for which a company should be considered a startup from 5 years to 10 years of its incorporation. The DPIIT also changed the annual turnover ceiling from 25 crore INR to 100 crores for any business company to be called a startup. Moreover, according to the Ministry of Corporate Affairs, the New Companies Amendment Rules 2020 has been issued by which all the companies that qualify as startups under the department of promotion for industry and trade policy 2019 policy would be eligible for the issuance of shares.

This development has come at a time when Covid-19 has disrupted almost all of the business companies especially the startups. The pandemic situation has also created a liquidity crunch in the industry which is followed by a continuous layoff and pay cuts for employees.

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A large majority of the startups companies use ESOPs to retain their employees. Considering the crunch in liquidity and decreased funds for new startup companies during the ongoing pandemic, this latest move by the government would help a lot of companies to compensate the payoff for the employees in a form of equity. As a result, they will be able to retain their key employees. 

Ankit Singhi who is a notable partner at Corporate Professionals says that the amendments in the equity provisions are a great step. He also added that the amendment which has been made in the definition of startup companies will help in the removal of ambiguity. He further added that the increase in the period of allotment from 5 years to 10 years will help startup companies to attract more talent.

In February of this year Finance Minister of India, Nirmala Sitharaman brought a proposal that allowed the startups companies to defer tax payment on the shares under the employee stock options plan by 5 years. She also invited the startup companies to give feedback on the changes that have been made. This latest development startup companies is of major significance as the allocation of the employee stock by Indian startup companies has increased over the past few years.

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