INDIA (DOMESTIC FIRMS): An Introduction to Employment

The landscape of Indian employment and labour laws has been constantly evolving and has undergone notable transformations.  

Several trends in Indian employment law have emerged, such as the increased hiring of expatriates by companies, companies surrendering their provident fund exemptions due to market reasons, and cashless ESOPs.

Effective Expat Integration Strategies for Indian Companies

It is common for Indian companies to seek specialised skills, expertise and leadership from around the world to drive growth and innovation. Some of the commonly adopted hiring models by organisations for expatriates in India include:

• Direct employment – The expat would be on the rolls of the India entity and will be entitled to employee benefits in accordance with applicable laws.
• Independent contractor arrangement – The Indian entity and the expat would be on a principal-to-principal basis and the arrangement involves expectation of quality of deliverables rather than supervision and control over the work and manner of performance.
• Secondment – Employment of expats with the overseas entity is temporarily suspended for the period the employee is seconded to the Indian entity and the Indian entity reimburses the foreign entity the cost pertaining to the seconded employee and becomes the economic employer of the seconded employee.
• Deputation – The expat stays on the foreign company’s payroll while providing services to the Indian entity on behalf of the foreign entity.

The initial step for expats to legally reside and work in India is to secure the appropriate visa. The Indian Government offers different types of work-related visas. The specific type of visa to be obtained is primarily based on the purpose, length of the visit and the nature of activities the expats intend to carry out in India.

In the event the business requirement is involvement in day-to-day activities for a long term, an employment visa could be obtained. A business visa is typically obtained for short term visits or attending meetings. There is also the option of applying for a business e-Visa which has a validity of 60 days and offers a fast-track process.

Another significant consideration while hiring expats is social security. Under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (the "EPF Act"), expatriates employed with an establishment in India to which the EPF Act applies are entitled to provident fund. For international workers, the contributions are required to be made on the entire salary without any cap. That said, expats who are contributing towards social security in their home country are exempted from making contributions towards the provident fund in India, provided:

• India has a social security agreement with that country, and
• the expat has submitted a certificate of coverage or detachment certificate issued from their host country.

Recently, the Karnataka High Court has struck down the provisions pertaining to international workers in the schemes formulated under the EPF Act. While this ruling will apply in Karnataka, unless the Supreme Court decides on the issue, it may only have persuasive value in other states.

The trend of increased hiring of expats indicates India’s attractiveness as a destination for foreign investment and talent. However, it raises questions about the impact on local employment opportunities and the need for effective talent management strategies to ensure a balance between local and expatriate workforce.

Unraveling the Ambiguities: Exploring the complexities of Surrender of Private Provident Fund Trusts

The EPF Act grants employers an exemption from contributing towards the statutory provident fund if they establish a private PF trust that offers benefits at least equal to, if not better than, those provided by the statutory fund. Further, the EPF Act as well as the EPF Scheme prescribe special conditions of maintenance of a private PF trust, which include, investment of the funds, annual audits and the responsibility to make good any loss to the trust as a result of any fraud, defalcation, wrong investment decision, etc. The intention of the law is to safeguard the interests and funds of the beneficiaries and ensure that they earn at least the statutorily prescribed rate of interest or higher.

Initially, multiple employers in India obtained an exemption for various reasons, including ability to seek better financial advice enabling better returns on investments and easier settlement of claims. However, with the losses suffered by many on account of the plummeting value of AAA rated bonds, multiple employers were prompted to consider surrender of their provident fund trusts as a desperate measure to salvage the remaining corpus and minimise any recoupment liability.

Under law, while surrender of a provident fund trust is a voluntary action, what follows is a process of reconciliation of accumulated funds to assess the liability of the employer, if any. This process involves a third-party audit of the PF trust. However, owing to the ambiguity under law, lack of jurisprudence and limited number of surrenders prior to 2020, there is limited clarity around the aspects of surrender and reconciliation – specifically in relation to manner of calculation of losses to be recouped, utilisation of reserves and surplus fund and treatment of interest shortfalls in the books. This has led to various PF trusts across the nation being deadlocked in the process of surrender and reconciliation for months. While the EPFO released the SOP for surrender of EPF Exemption codifying the process to some extent on 30 October 2023, the afore-mentioned areas of uncertainty remain unaddressed.

The primary concern is posed by the ambiguity around the calculation of losses to be recouped, which has evidently arisen due to lack of interpretation of the term "loss" under the EPF Scheme. In the absence of such guidance, EPFO is of the view that loss on each script is required to be recouped by the employer, regardless of whether the trust distributed interest returns at statutory rate or higher during the relevant financial period. This evidently results in significant financial implications for the employers surrendering their exemption, arguably entailing a liability they had not anticipated. While the EPFO advocates for these measures to safeguard its future liabilities towards beneficiaries, the employers argue that the obligation to recoup the losses should arise only when the overall liability of the trust towards its members exceeds its earnings. Notably, in some cases employee claims are on hold due to the incomplete reconciliation process, causing widespread distress among the workforce.

Should the issue proceed to litigation, it will be intriguing to observe how the judiciary navigates the delicate balance between protection of the EPFO's potential liabilities and the rights of the employers.

Collaborative Incentivisation: Streamlining ESOPs to minimise financial burden

Employee Stock Option Plans (ESOPs) are a great way to incentivise employees while encouraging a culture of joint ownership between the employer and employees. ESOPs help in increasing productivity as well as ensuring that the employee’s career trajectory is linked directly to a company’s growth. These are excellent tools for attracting and retaining top talent for companies. However, given regulatory requirements in India, employees may view these plans as ineffective due to difficulties faced at the time of exercise.

The Companies Act, 2013 (CA2013) prohibits issuance of shares of the Company at a discount. Further, the rules under CA2013 require that the exercise price or the formula for arriving at the exercise price needs to be approved by the shareholders at the time of issuance of the Plan. The above implies that ESOPs can only be exercised by payment of exercise price, which cannot be below the face value of underlying shares. Thus, for an employee to own shares pursuant to ESOPs, such an employee must have sufficient liquidity to fund the corresponding exercise price. This could be significantly problematic for employees where the difference between the market price of shares and the exercise price is not substantial. 

Therefore, employers have begun exploring ESOP structures that are more beneficial for employees. While not covered explicitly, both the CA2013 and the SEBI Regulations contain provisions indicating the possibility of funding the exercise price for the employees. CA2013 allows a company to make provision for granting loan to the trust for purchase of shares held by it for the benefit of employees. Similarly, SEBI Regulations allow:

• the trust to sell shares held by it in the secondary market to fund payment of exercise price by the employees, their tax and related obligations; and
• the company or trust to fund or permit the empaneled stock brokers to make arrangements to fund the payment of exercise price by employees and related obligations, while further permitting that such amount can be adjusted against the sale proceeds of the shares of such employee.

Similar provisions were also part of the erstwhile SEBI Regulations and were reaffirmed by the SEBI in an informal guidance provided to a stockbroker company.

Above provisions give employers the necessary latitude to fund the exercise price for employees, and thus provide for cashless exercise of ESOPs. This process would essentially entail sale of adequate number of shares by the trust or an empaneled broker and the subsequent usage of the proceeds from such sale to cover the amount owed by the employee to exercise his/her ESOPs. This helps to reduce the ultimate outlay of cash from the employee’s hand and in aligning the plan with their financial appetite. For the employers, cashless exercise results in increased participation by employees in the company’s growth, fostering a more collaborative workforce.