ESOP – Singapore

Unlike India, ESOP structuring, laws and regulations, procedures, are not codified. Instead they rely on
the interpretation of certain laws and the overall structuring regime that in place. Firstly, before any
shares in the company can be issued, whether under an ESOP or pursuant to the exercise of any other
form of share options, the directors of the company must first obtain the authorisation of the company’s
existing shareholders under section 161 of the Companies Act (Chapter 50) (“CA”) for the issuance and
allotment of shares. Authority under section 161 of the CA may either be obtained for a single issuance
of shares, or for the issuance of shares more generally.

Furthermore, it is mandatory for the ESOP scheme to be carried out through a prospectus under the
Securities and Futures Act (sec. 240) and registered with the Monetary Authority of Singapore, any offer
of securities or securities-based derivatives contracts, including shares and share options, must be
accompanied by a prospectus. To avoid having to comply with this requirement, which may entail
incurring significant costs.

The SFA sets out exemptions to the prospectus requirement. The exemptions may be subject to other
conditions and restrictions under the SFA which are not specified in detail below, including restrictions
on advertisements and selling or promotional expenses (Subdivision (4 - Exemptions), Division 1, Part 13,
SFA).

These exemptions do not apply if both:

 The company makes the offer on the basis that the person will sell the securities or securities-
based derivatives contracts to another person.

 The subsequent offer does not qualify for an exemption.

In these cases, the company will be deemed to be making an offer to the final offeree and therefore
subject to the prospectus requirements. Any document used to make the subsequent offer will be
deemed to be a prospectus issued by the company.

Qualifying Persons Exemption

A company may not need to produce a prospectus if both:

 A qualifying person will hold the securities or securities-based derivatives contracts, or these will
be held for the benefit of a qualifying person.

 The securities or securities-based derivatives contracts are those of the company or its related
corporations.

A qualifying person includes:

 A bona fide director or equivalent person.

 A former director or equivalent person.

 A consultant or adviser.

 An employee or former employee of the entity or of a related corporation.

  The spouse, widow or widower, child, adopted child, or step-child below the age of 18 of any of
the above.

A related corporation includes a holding company, a subsidiary, or a fellow subsidiary of the entity.

Small Offers Exemption

A person offering securities or securities-based derivatives contracts to another person may not need to
prepare a prospectus if both:

 The total amount raised by the offeree within any 12-month period does not exceed SGD5
million or its equivalent in a foreign currency.

 For each offer, the offeror gives the offeree:

 a prescribed written statement that the offer is made reliant on an exemption under the
SFA without a prospectus registered with the Monetary Authority of Singapore; and

 a notification in writing that the securities or securities-based derivatives contracts to

which the offer relates must not be subsequently sold to any person unless certain
specified requirements under the SFA are met.

Private Placement Exemption

A person making offers of securities or securities-based derivatives contracts to no more than 50 persons
within a 12-month period may not need to prepare a prospectus. The limit is on the number of offerees
rather than the number of people accepting the offer.

Taxation

According to Singaporean legislation, all ESOP gains that are related to Singaporean employees who are
physically present in Singapore will be subject to Singaporean taxation. This means that any benefit
received from these ESOPs by an employee of a Singapore-based company must be taxed. Basically, this
ESOP taxation in Singapore is known as capital gain tax, which is an amount that is charged when the
shares acquired from ESOPs are sold at a price higher than the purchase price.

Hence, any employee (while working in Singapore) is exercising their right to such stock options is liable
to pay taxes on such gains awarded on or after January 01, 2003, and as a result, such gains are to all be
recorded in the employee’s tax return statements.

QEEBR tax deferment – The QEEBR plan enables the deferral of stock option gains tax for up to five
years with an interest charge. The goal of this plan is to make it easier for employees to use stock options
as a form of compensation by easing the liquidity issues they encounter while exercising their options.

Vesting requirements – The minimum vesting period for an ESOP with an exercise price greater than the
fair market value at the time of award is one year. The minimum vesting term is two years for ESOPs with
exercise prices below the fair market value at the time of grant.
Deemed exercise rule – Gains from unexercised ESOP are taxed on a “deemed exercise” basis when a
foreign employee leaves their employment in Singapore. The deemed exercise rule is applicable when a
foreigner quits his or her job in Singapore, when a permanent resident leaves the country permanently,
or when a permanent resident is assigned to work abroad.

Employee Requirements

Under certain circumstances an employee cannot be accorded any ESOPs such as:

 The Employee has declared bankruptcy.

 The employee is a delinquent taxpayer according to IRAS records.
 Employee’s tax on stock option gains is less than $200 Employee has been given area
representative status.
 The employee is not permitted to collect his tax in instalments.