What are the tax implications if companies buy back their ESOPs?

esop Shares, which represent ownership in the company, are offered to its employees at a price less than its fair value value in the market.

Companies may decide to buy back ESOPs for a variety of reasons, including the intention of promoters to offer liquidity to their employees holding ESOPs, especially in the case of unlisted companies that are not available for trading in the secondary market. Huh.

Providing liquidity by unlisted companies through periodic buybacks of ESOPs is also becoming an important consideration among startups. Controlling dilution of equity in the company can also be another reason why promoters offer buyback of ESOPs.

Buyback of ESOP is an act similar to buy back of shares by an entity.

Bharat Reddy, partner, Cyril Amarchand Mangaldas, said buybacks of shares from ESOP shareholders would have to comply with the same conditions as buybacks from other shareholders.

In case of buyback, any capital gain on tender of shares to the company is exempt from tax in the hands of investors. Therefore, ESOP holders need not pay any tax on the profit made while tendering the shares in the buyback.

According to Neeraj Agarwal, Partner, Nangia Andersen LLP, the exemption is available irrespective of the holding period or whether it is listed or unlisted shares.

Note that the employee must have already paid the perquisite tax (the difference between the fair market value of the allotted shares plus the amount paid by the employee) on exercising the ESOP.

The value of the shares offered in the buyback by all shareholders may exceed the amount set aside for the offer by the company.

Thus, acceptance ratio, which indicates the total number of shares as compared to the total number of shares accepted by the company in the buyback offer, is one of the key points to be considered by an investor.

“As per the rules of the Companies Act, the acceptance ratio is applicable to all classes of shareholders and will also include the shares allotted under ESOPs,” Agarwal said.

Thus, all the shares offered in the buyback could not be accepted by the company. Shares sold in third party or secondary market will continue to attract capital gains tax in the hands of employees.