pri Share Warrant & ESOP- Procedure of Issue & Taxation Share Warrant & ESOP- Procedure of Issue & Taxation

Article explains what is Share Warrant and what is ESOP. It further explains to who Share Warrant and ESOP can be issued, Procedure for issue of Share Warrant and ESOP and Taxation of Share Warrant and ESOP.

Share Warrant:

What is Share Warrant?

-Share warrant is an option issued by the company that gives the warrant holder a right to subscribe equity shares at a pre determined price on or after a pre determined time period.

-Share warrants are a common source of funding used by companies, both public and private. Share warrants are similar to the concept of stock warrants used in United States.

-Share warrants entitle the issuer to take advantage of future appreciation in the price of stock.

-If the issuer issues the shares right away, the issuer will get the current pricing. The warrant, on the other hand, defers the issuance of the shares to a future date.

Employee stock ownership plans

To whom Share Warrant can be offered

  • It can be issued to anyone.

Procedure for issue of Share Warrant

  • Written Application: – Shareholder has to make a written application to request to issue share warrant in exchange of his share certificate. He has to send necessary stamp duty and requisite (necessary) fee.
  • Lodgement Ticket: –After the receipt of application, the secretary scrutinizes (check) it and issues a Lodgement Ticket. It is a document given as an acknowledgement for the deposit of share certificate.
  • Board’s Approval:-if the secretary is satisfied with the document and application, he places the request before the Board. A Board meeting is called especially for this purpose. A resolution (decision) is passed in this meeting regarding the issue of share warrant. The resolution also gives authority to sign and put seal on the warrant.
  • Preparation of Share Warrant: – The secretary gets the share warrants prepared by making proper entries and putting a seal on it.
  • Signing on the Warrant: –The share warrant is signed by the directors and countersigned by the secretary.
  • Entries in the Register of Members: –The name of the share holder is cancelled from the Register by writing the particulars of share warrant, such as number of warrant, date of issue etc.
  • Delivery of Share Warrant: –Then the shareholder is informed about the warrant and the warrant is delivered to him in exchange of lodgement ticket.

Taxation of Share Warrant

  • When warrants are exercised to buy the underlying stock, a stated strike price is paid to the issuing company. The difference between the strike price and the price of the share (market price on the date of exercise) is taxable income (ordinary income in the year of exercise). Capital gain taxation does not arise since because the shares are not owned prior to exercising the warrants.
  • Capital gain taxation arises once if the above shares are sold. The difference between the exercise price and price at which it was sold will be the capital gain. Long term and short term capital gain will be determined based on the holding of the shares for more than 12 months and less than 12 months respectively.


What is ESOP?

  • ESOP is the option (right not an obligation) provided to employees to purchase the shares of the company at a future date at a pre-determined price.
  • ESOPs have an exercise period – the pre-determined period within which the option must be exercised  by the employee. There must be a minimum period of one year between the grant of option (receiving the right) and vesting of option (earns the right).
  • Options granted to employees are not transferable to any other person.
  • ESOPs have a Vesting Period and Vesting Percentage. Vesting period is the amount of time the employee needs to work with the company to be eligible for the ESOP.
  • Valuation shall be done at the time of “grant of Option” and “exercise of option” by registered valuer.

To whom ESOP can be offered

  • It can’t be offered to Promoters or Directors who directly or indirectly hold 10% shares in the company nor can be offered to non-employees.

Procedure for issue of ESOP

  • Draft ESOP Scheme
  • Conduct Board Meeting & pass the Scheme.
  • Call the General Meeting to approve the Scheme.
  • File Form MGT 14 within 30 days of passing the resolution.
  • After approval of ESOP scheme by the shareholders, grant options to the eligible employees.
  • Vesting of Option
  • Exercise of Option
  • As and when the Allotment is made PAS 3 should be filed with the ROC
  • Register of ESOP should be maintained in Form SH 6
  • Disclosures in Board of Directors Report- Employees Stock Option Scheme: (a) options granted; (b) options vested; (c) options exercised; (d) the total number of shares arising as a result of exercise of option; (e) options lapsed; (f) the exercise price; (g) variation of terms of options; (h) money realized by exercise of options; (i) total number of options in force; (j) employee wise details of options granted to;- (i) key managerial personnel; (ii) any other employee who receives a grant of options in any one year of option amounting to five percent or more of options granted during that year. (iii) identified employees who were granted option, during any one year, equal to or exceeding one percent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant;

Taxation of ESOP

  • When the options are exercised by the employee

When the options are exercised, the difference between the Fair Market value and the exercise price are treated as perquisite. The employer deducts TDS on this perquisite. This amount is shown in the employee’s Form 16 and included as part of total income from salary in the tax return.

  • When the shares are sold at a profit

The difference between the Fair Market Value on Exercise date and the Selling price is treated as Capital gains and the income is taxed under the head Capital Gains. Taxes were either short term (if the holding period is less than a year) and long term (if holding period is above 1 year).

In case of listed shares, if the holding period is more than 12 months, capital gains will be treated as Long-term capital gains and no tax will be levied if such capital gains doesn’t exceeds Rs. 1 lakh. However, in case the amount of capital gains is more than Rs. 1 lakh then tax shall be levied @ 10% without indexation benefit. If holding period is less than or equal to 12 months, then such gains will be treated as short-term capital gains & will be taxable @ 15%.

In case of unlisted shares, gains will be treated as long-term if shares are held for more than 24 months. Tax will be levied @ 20% with indexation benefit and @10% without indexation benefit. If holding period of such shares is less than or equal to 24 months, gains will be treated as short-term and will be taxable as per slab rates of the taxpayers.

Disclaimer: The contents of this article are for information purposes only and does not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

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Qualification: Student - CA/CS/CMA
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Location: chennai, Tamil Nadu, IN
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  1. Surbhit Katre says:

    In your article, you have mentioned that on conversion of share warrants into equity shares, The difference between the strike price and the price of the share (market price on the date of exercise) is taxable income (ordinary income in the year of exercise).

    My question is under which head such diff will be taxable and also mentioned relevant section no.?

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July 2021