Esop

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RAHUL (Querist)
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26 October 2013 hello guys can any 1 clear concept what is fair value of option...is it difference amt b/w market price and exercise price in context of ESOP.....topic

Ajay Mishra

Ajay Mishra (Expert)
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26 October 2013 Hi

FMV= Averge of opening & closing price of the stock exchange which records highest trading of shares on the date of exercise.

For unlisted companies, the CCI had prescribed two methodologies — net asset value (NAV) and, profit earning capacity value (PECV) — for calculating fair market value. According to the net asset value method, the fair value will be the networth of the company, as per its balance sheet, divided by number of shares. Under the PECV method, as the name suggests, fair market value depends on the expected future profitability of the company based on factors like economic risk, type of industry, business strength, expected future contracts etc.

The FBT would be levied on the difference between the fair market value of the stock on the date of vesting of the option and the ESOP cost to the employee. The date of vesting of ESOP will be the point of valuation and its exercise date will be the point of taxability.

The tax experts concur with proposal. "The government is to prescribe the method/ formula for determining fair market value on the date of vesting and there are various option which may be considered. In case of listed companies, the fair market value is expected to be linked to the traded price of share on the date of vesting.

In case of unlisted companies, the fair market value may be determined by different methods like net asset value, price earnings, future earnings etc. A simpler method linked to the three or more years of financial statements as was done in case of ESOP guidelines issued earlier,"