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Startups and ESOPs Buyback



Startups in India are on their way to conquer the world. The 1.3 billion ‘youth-centric population’ serves as a huge market to execute revolutionary ideas. We see innovation and new ideas popping up at every corner in the country.

The startup ecosystem has seen a boom in recent years. By the end of 2019, India had a total of 80,000 startups, which together raised USD 10bn. This puts India’s venture capital activity just behind America and China. In spite of billions of dollars pouring into the entrepreneurial ecosystem every year, there are startups that have ‘bootstrapped’ their journey. They start out with a little capital, a handful of talented people and build something truly amazing.

ESOPs are a type of employee benefit plan which intends to encourage employees to acquire stocks or ownership in the company. The ESOPs buyback trend started back in 2018 when Flipkart announced a 100% buyback options of vested ESOPs. Since then, companies such as Oyo, Unacademy, Meesho, CarDekho, Razorpay, Swiggy, Byju’s, and Zerodha have rewarded their employees via stock buyback or secondary transactions. It is a great way to retain talent and incentivize financially.

What is ESOPs Buyback?

  • A company allots ESOPs to its employees with certain terms and conditions attached to it. (Employees based certain prerequisites such as vesting periods, performance, etc.)
  • For companies listed on the stock market, employees can sell their ESOPs at the prevailing market price once their lock-in period is over. For unlisted companies, employees can sell vested ESOPs back to the employer (buyback).
  • Any amount that the employees receive through these ESOPs sales becomes part of their income. It is also subjected to taxes as per prevailing income tax rates.
When it comes to a buyback of shares of an unlisted company, the provisions under sections 10(34A) and 115QA of the Income Tax Act shall intervene. As per section 10(34A), any income arising to a shareholder (including ESOP-shares) on account of buyback of unlisted shares by the company shall be exempt in the hands of such shareholders. Further, as per section 115QA, the tax @ 20% shall be paid by the unlisted company on the buyback of its shares.
Tip
When it comes to a buyback of shares of an unlisted company, the provisions under sections 10(34A) and 115QA of the Income Tax Act shall intervene. As per section 10(34A), any income arising to a shareholder (including ESOP-shares) on account of buyback of unlisted shares by the company shall be exempt in the hands of such shareholders. Further, as per section 115QA, the tax @ 20% shall be paid by the unlisted company on the buyback of its shares.

Stock Broker Champions – Zerodha

Zerodha had allocated an ESOPs pool worth INR 200 cr. to 850 employees in September 2019. A few days ago it announced a buyback worth INR 65cr. from 700 employees. A buyback at INR 700 per share – which is more than 4 times the book value (INR 170 cr.).

The customer base of Zerodha has increased significantly in the past few months. The stock market is most active now since 2007. First-time investors have turned towards trading due to market volatility in the COVID-19 lockdown.

The stock-broking entity has bootstrapped its journey with zero external funding. Hence, it has never been ascribed a valuation. But after this buyback worth INR 65 cr., the company has claimed a unicorn valuation worth INR 7,000 crore (roughly USD 1 bn)!

Zerodha has built a massively successful business in the last 10 years. It has also funded other budding startups like – Smallcase, Finception, Digio, Streak, Quicko, and many more. With ESOPs it has managed to keep employees’ stake and retain senior talent. And there is definitely a delicate sense of pride when you are a part of business success.

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Got Questions? Ask Away!

  1. Hey @shriramsingla

    Gains arising from Buyback of shares to an individual is exempt u/s 10(34A).

    Therefore, no tax is payable on gains from buyback and such income must be reported under exempt income in the ITR.

    Hope this helps :slight_smile:

  2. As per the announcement in Budget 2019, the buyback tax was imposed on companies effective 1st July 2019. Thus, any gain/loss from buyback after 1st July 2019 is exempt from tax in the hands of the shareholder.

    Gains from buyback should be reported as exempt income under Schedule EI of the ITR.

    Read more about Buyback here - Section 115QA - Tax on Buyback of Shares

  3. so . in case of buyback ; the company pays tax .
    so . ultimately the company’s reserves gets reduced as the money is paid by the company on the tax on the buyback .
    so . ultimately it is the shareholders who suffer the loss ! am i right ?

    suppose . e.g. you and i both are share holders .

    i opt for buyback , give the shares to the company . company pay me money which is tax free for me .
    company pay the tax .
    you don’t opt for buyback . you stay as a shareholder of the company . so , you as a sharholder got your reserves reduced as the company paid the tax .

    am i right ?

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jacksonjohn says: (Awaiting Approval)

2024-11-28 02:45:02

It's fascinating how companies like Zerodha have leveraged these strategies for success. Speaking of success, have you ever considered taking an iq test free? It could be a fun way to challenge your mind while exploring your potential!

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e says: (Awaiting Approval)

2024-03-18 13:09:19

e

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e says: (Awaiting Approval)

2023-09-06 16:53:52

e

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Arjun Sharma says:

2020-09-18 12:44:05

We need next wave of Narayan Murthys. Its great to see young startups building ecosystem where all stakeholders are rewarded. Way to go Zerodha.

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