Mumbai: Walmart-owned ecommerce platform Flipkart has created an Employee Stock Ownership Plan (Esop) pool of Rs 17,000 crore, propelling it to the top among Indian technology firms that have allocated stock options to staff.
The homegrown e-tailer was followed by Oyo, Zomato, Paytm and Nykaa, according to data exclusively sourced by ET from executive search firm Longhouse Consulting.
Nearly 40 Indian startups bought back Esops worth Rs 3,200 crore between July 2020 and November this year, ET reported earlier.
Flipkart’s Rs 600 crore buyback was one of the largest this year.
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Consumer tech firms Zomato and Nykaa generated a windfall for investors and employees after they both listed on Indian exchanges earlier this year. They have had the largest Esop pools in the industry.
Zomato’s stock market debut spawned 18 dollar millionaires, ET reported previously.
Regional language social media platform ShareChat, which entered the unicorn club in April, put together an Esop pool of Rs 462 crore.
Despite the possibility of wealth creation that larger Esop pools present, several experts said that issues around taxation at the time of exercising the options, infrequent liquidity programmes, and long-drawn vesting schedules are some of the major challenges that employees face.
“The biggest issue remains taxation at the time of exercising unless startups are registered under Section 80IAC and exempted by the Income Tax department under Section 56(2). Less than 300 startups receive the tax exemption, which is not even 0.5% of startups in India,” said Deepak Abbot, a former executive at Paytm and cofounder of gold loan company Indiagold.
Vesting schedules also often do not match the pace of business growth, as startups are becoming unicorns within months, said Pallavi Nautiyal, regional head of Qapita, an equity management platform.
“Stock options are talent currency. From the employees’ perspective – rather than being a lottery – stock options are hard-earned currency awarded against actual performance, risk-taking and opportunity cost. This needs to be the guiding principle embedded in the design and implementation of Esops so that they are transparent, concrete and predictable,” she said.
Repeat taxation – in the form of perquisite tax at the time of exercise – and capital gains tax at the time of liquidation are other problems, Nautiyal said.
“When employees exercise their stocks, they have to pay taxes immediately on the notional gains,” said Abhishek Goyal, cofounder of data platform Tracxn.
“It takes companies a while to implement their Esop policy – since it is not a trivial thing and there are many tax nuances around it. And people who leave before that, there is no way to allow them to exercise options,” Goyal added.
Even with the hurdles, Esops are set to gain in popularity in the coming year and a primary way to compensate people, he said.
“So far in India, employees were always looking for fixed salary as per market benchmarks and Esops were usually a cherry on top,” Goyal said. “Now that many people have seen their Esops being cashed out, there will be an increasing trend where people would accept lower fixed salaries against higher Esop components, and this trend further aggravates the need to bring policy around Esops and in some ways also checks bad behaviour.”