Executive Compensation Alert: 2009 Update on Stock Options in India

Apr 13,  · Stock Options Call: Stock Options Call is the right to buy a certain number of shares of a certain stock at a stated price within a given period of time. The Stock Option buyer pays to the

If you want to book profit or cut your losses, you may want to close out your position by squaring off. Previously, the determination of "fair market value" was required to be made by an India-licensed Category I merchant banker.

US stock options exercised in India

Chapter Understanding How Call Options Work What are Options? In the derivatives market, you may want to Buy shares or Sell them at a specific price in the future. On this basis, there are two types of options available in the derivatives markets – Call options and the Put options.

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India's currency exchange controls applicable to option exercises by employees have been liberalized. There is presently no limit on the amount that employees or directors are allowed to remit for this purpose so long as the U. A purchase of U. The requirements for global uniformity and for filing of annual returns apply to all employers in India.

The RBI has also granted general permission to foreign companies to repurchase shares issued to their employees in India under a stock option plan. Previously, such a repurchase required advance approval from the RBI. Now such approval is unnecessary if the following requirements are met: The general authorization for repurchase of shares appears to be in addition to the existing general permission to the optionees to sell their shares after exercise.

A voluntary sale by the employee unlike an involuntary repurchase compelled by the employer in compliance with the above requirements is subject to the condition that the sale-proceeds are immediately remitted to an account with an "Authorised Dealer" bank in India in any case not later than 90 days from the date of such sale.

As in the United Kingdom, employees in India generally have a written employment agreement. If the employment agreement expressly states that the grant of equity compensation is entirely within the employer's discretion, or makes no mention of equity compensation being part of the employee's pay, then it is unlikely that an employee can claim any special or ongoing entitlement to additional equity compensation although there is no harm in expressly stating this in the stock option agreement.

Data privacy is a worldwide concern now, no less in India than in the U. India's close legal history with the United Kingdom suggests it may eventually follow the European Union's privacy practices to an even greater degree.

Overall, India presents a welcome climate for investment and its economy continues to grow albeit at a somewhat slower pace due to the global economic downturn. With the recent change to India's tax laws there is greater flexibility in structuring compensation packages and a greater ability to align the interests of employees with those of their employer's stockholders.

With respect to equity compensation practices, all employers should consult with a chartered accountant or attorney in India to evaluate the best approach under their circumstances at the time. For more information on this, or related matters, you may wish to contact any attorney in the Executive Compensation and Employee Benefits Group:.

Gopalan of Dawn Consulting in Bangalore, India at srg dawnconsulting. It is not intended, and should not be regarded, as legal advice. Readers who have particular questions about these issues should seek advice of counsel. So, you would rather protect yourself by paying a small premium than make losses by shelling a greater amount in the future. As we read earlier, the buyer of an option has to pay the seller a small amount as premium.

Seller of call option has to pay margin money to create position. In addition to this, you have to maintain a minimum amount in your account to meet exchange requirements.

Margin requirements are often measured as a percentage of the total value of your open positions. Let us look at the margin payments when you are buyer and a seller:. Remember, while the buyer of an option has a liability that is limited to the premium he must pay, the seller has a limited gain.

However, his potential losses are unlimited. The margins are levied on the contract value and the amount in percentage terms that the seller has to deposit is dictated by the exchange. It is largely dependent on the volatility in the price of the option. Higher the volatility, greater is the margin requirement.

So, the seller of a call option of Reliance at a strike price of , who receives a premium of Rs 10 per share would have to deposit a margin of Rs 1,16, How to settle a Call Option: When you sell or purchase an options, you can either exit your position before the expiry date, through an offsetting trade in the market, or hold your position open until the option expires.

Subsequently, the clearing house settles the trade. Such options are called European style options. Let us look at how to settle a call option depending on whether you are a buyer or a seller. There are two ways to settle — squaring off and physical settlement.

If you decide to square off your position before the expiry of the contract, you will have to sell the same number of call options that you have purchased, of the same underlying stock and maturity date and strike price. When you square off your position by selling your options in the market, as the seller of an option, you will earn a premium. The difference between the premium at which you bought the options and the premium at which you sold them will be your profit or loss.

Some also choose to buy a put option of the same underlying asset and expiry date to nullify their call options. The downside to this option is that you have to pay a premium to the put option writer. Selling your call option is a better option as you will at least be paid a premium by the buyer.

If you have sold call options and want to square off your position, you will have to buy back the same number of call options that you have written. These must be identical in terms of the underlying scrip and maturity date and strike price to the ones that you have sold. In this section, we understood the basics of Options contracts.

In the next part, we go into details about Call options and Put options. Mon to Fri — 8. Existing customers can send in their grievances to service. No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in investor's account.

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