INDIA Law and Practice Contributed by: Lalit Kumar, JSA Advocates and Solicitors
6. Exits 6.1 Investor Exit Rights
• sweat equity shares; • stock appreciation rights; and • restricted stock units. 5.3 Taxation of Instruments Taxation of ESOPs As per the Indian income tax laws, the taxation of ESOPs is triggered at two stages. At the time of exercise of options as a perquisite The tax will be levied on the notional profit at the time of exercising the ESOPs calculated as the difference between the share’s prevalent fair market value (FMV) on the exercise date and the exercise price paid on ESOPs. At the time of sale of shares as capital gains Gains derived at the time of sale of shares which are allotted pursuant to ESOPs will be subject to capital gains tax in India. The taxable value is calculated on the excess of sale price of shares over the fair market value of shares on the exer - cise date. The tax is applicable on the period of holding of shares before sale. If the shares are held for a period exceeding 24 months, then the tax is calculated at the rate of 12.5% and if held for a period less than 24 months, tax will be cal - culated as per the applicable tax rate. 5.4 Implementation Generally, at the time of investment in an inves- tee company, a certain pool for ESOPs is kept aside for employees; generally it ranges from 2.5% to 5%. Sometimes the investment round allocates capital to implement and fund employ - ee incentive programmes by providing what is recorded in the shareholders’ agreement; and this is effected as a condition precedent to the closing of the transaction.
For exits vis-à-vis the founders, the investors get a priority for exit (ie, they have preference over the promoters/founders at the time of exit). Exits typically happen pursuant to: • a sale in the IPO; • trade/strategic sale; • tag-along (when there is a change in control); • drag-along; • buyback of shares by the investee company; or • a combination of one or more of such meth - ods of exit. Exits vis-à-vis other investors happen on a pro- rata basis (ie, the investors get a proportionate share of the proceeds on exit). Typically, exits happen after five to six years of investment. Should there be a breach or any event of default, the investors have a right of exit even before the agreed term of exit. 6.2 IPO Exits IPO exits are still the most preferred mode of exit. Over the years, investors have exited through IPO by being the selling shareholders in the IPO. As mentioned at 1.1 VC Market , as per the Bain & Co report, some notable exits in 2024 include exits of investors in Policy Bazaar, Paytm, Mamaearth, Indigo Paints and Prataap Snacks. IPO is a long process and is driven by SEBI regu - lations. All rights of the investors fall away on the IPO. India has robust and well-established capi - tal markets, with two major stock exchanges: Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The IPO process is pri - marily divided into pre-issue, launch prepara -
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