Rule 8 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 8 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 allows an Indian company to issue employees' stock options, sweat equity shares and Share Based Employee Benefits to employees and directors who are resident outside India, including those of its holding company, joint venture or wholly owned overseas subsidiary. The rule was substituted in full on 12 April 2022 and now has four provisos and a further proviso.
This article is based on the Rules as notified on 17 October 2019 (S.O. 3732(E)) as amended by the notifications named in this article; the latest amendment consulted is S.O. 4870(E) dated 2 September 2026. Amendments made after that date should be checked in the Gazette. There is no official consolidated text; rule 8 was read as substituted by S.O. 1802(E), with the 2019 text noted as the earlier version. For the report that follows an allotment, see our FC-GPR reporting page.
Under rule 8 as substituted by S.O. 1802(E) of 12 April 2022, an Indian company may issue "employees' stock option", "sweat equity shares" and "Share Based Employee Benefits" to employees or directors, or employees or directors of its holding company, joint venture or wholly owned overseas subsidiary or subsidiaries, who are resident outside India. The scheme must follow SEBI regulations, the Companies (Share Capital and Debentures) Rules, 2014 or other applicable law; the issue must respect the sectoral cap; prior Government approval is needed in an approval-route company and for citizens of Bangladesh or Pakistan.
What rule 8 says now
The 2019 rule, headed "Issue of Employees Stock Options and sweat equity shares to persons resident outside India", covered only stock options and sweat equity shares. S.O. 1802(E), the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2022 (12 April 2022), substituted the whole rule. Its heading is now "Issue of Employees Stock Options, sweat equity shares and Share Based Employee Benefits to persons resident outside India". The opening words say an Indian company may issue the three kinds of benefit to its employees or directors, or employees or directors of its holding company or joint venture or wholly owned overseas subsidiary or subsidiaries, who are resident outside India.
The three terms are defined in rule 2: "ESOP" as defined under the Companies Act, 2013 and issued under SEBI regulations; "sweat equity shares" as defined under the Companies Act, 2013; and "Share Based Employee Benefits" (clause (ama), inserted by the same 2022 notification) as the issue of equity instruments to such employees or directors under schemes formulated by an Indian company. See our article on equity instruments, convertible notes and units.
The four provisos
| Proviso | Condition as substituted in 2022 | Position in the 2019 text |
|---|---|---|
| (a) | The scheme has been drawn in terms of regulations issued under the SEBI Act, 1992, or the Companies (Share Capital and Debentures) Rules, 2014, or as per other applicable law, as the case may be | Same, without the words "or as per other applicable law" |
| (b) | The ESOP, sweat equity shares or Share Based Employee Benefits issued under the applicable rules or regulations comply with the sectoral cap applicable to the company | Same, for ESOP and sweat equity |
| (c) | Where foreign investment in the company is under the approval route, the issue requires prior Government approval | Joined with the Bangladesh and Pakistan condition in one clause (c) |
| (d) | Issue to a citizen of Bangladesh or Pakistan requires prior Government approval | See above |
The Rules print the phrases "approval route" and "prior government approval" as in the table. How the routes work is explained in our article on the automatic route and the Government route. Our article on rule 6 deals with the land-border rule, which is separate from the Bangladesh and Pakistan condition here.
Further proviso. An individual who is a person resident outside India exercising an option which was issued when he or she was a person resident in India shall hold the shares so acquired on exercising the option on a non-repatriation basis. This stood in the 2019 rule, with the word "shares" for the equity instruments obtained.
The Master Direction's reading
The Reserve Bank's Master Direction - Foreign Investment in India, updated up to June 15, 2026, repeats rule 8 in paragraphs 6.13.1 and 6.13.2. It adds two Notes that the Rule itself does not print, and they are the Master Direction's statements, not part of rule 8:
- A Note records the dates from which sweat equity shares (June 11, 2015) and equity instruments under other share-based employee benefit schemes (April 12, 2022) were permitted to persons resident outside India.
- A Note says the percentage of foreign investment is calculated on a fully diluted basis, upfront, at the time of issue or grant of options, sweat equity shares and Share Based Employee Benefits to persons resident outside India.
The Master Direction does not change the provisos. Where it and the Gazette differ, the Master Direction itself says in paragraph 1.1 that the notification prevails.
Sectoral caps and the grant date
Proviso (b) is easy to overlook. A company that is close to its cap cannot grant options that would, once exercised, take foreign investment above the cap. The Master Direction's note on fully diluted calculation at the time of grant points the same way: the percentage is worked out upfront at grant. That is the Master Direction's statement; the proviso itself speaks only of compliance with the sectoral cap. The cap is explained in our article on FDI, foreign portfolio investment and the sectoral cap.
For the corporate side, see our guides on employee stock options for private companies and sweat equity shares under section 54 of the Companies Act, 2013.
Reporting
Rule 8 does not describe a reporting form. The Mode of Payment and Reporting of Non-Debt Instruments Regulations, 2019 deal with it; see our article on Form FC-GPR, Form ESOP, Form DRR and the LLP returns. The form is not described here.
A worked example
Nordvik Holdings is the foreign parent of Lakshya Components Private Limited. Lakshya adopts a scheme that follows the Companies (Share Capital and Debentures) Rules, 2014 and grants options to a Nordvik director resident abroad. Proviso (a) is met. If foreign investment in Lakshya's business is on the automatic route and the grantee is not a citizen of Bangladesh or Pakistan, no prior Government approval is needed under provisos (c) and (d); if Lakshya were in a sector under the approval route, prior Government approval would be needed. The options, once exercised, must keep foreign investment within the cap. If the grantee had earlier been resident in India when granted the option and has since moved abroad, the shares he acquires on exercise are held on a non-repatriation basis.
Need help with ESOPs for overseas staff?
Granting options to employees of a foreign parent raises FEMA, company-law and reporting questions together. Our FC-GPR reporting team can check the scheme against rule 8 and handle the report after allotment.
Key takeaways
- Rule 8 was substituted on 12 April 2022 and now covers ESOPs, sweat equity and Share Based Employee Benefits.
- Eligible people are employees or directors, or those of the holding company, joint venture or wholly owned overseas subsidiary, resident outside India.
- The scheme must follow SEBI regulations, the 2014 Companies Rules or other applicable law.
- The cap must be respected; approval-route companies and citizens of Bangladesh or Pakistan need prior Government approval.
- An individual who was resident in India when granted the option holds the shares on a non-repatriation basis.
Read next
- Rules 7 and 7A of the FEM (Non-debt Instruments) Rules, 2019: rights issue, bonus issue and renounced rights
- Rule 18 of the FEM (Non-debt Instruments) Rules, 2019: convertible notes of startups
- Rule 9(1) to (3) of the FEM (Non-debt Instruments) Rules, 2019: sale of shares between residents and non-residents
- FEMA compliance for startups receiving FDI
Disclaimer: Based on the Gazette text of the instrument this article names, as notified and as amended by the notifications named in the article (for the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 the latest amendment consulted is S.O. 4870(E) dated 2 September 2026), as consulted on 2 October 2026. There is no official consolidated text; the provisions were read with each amendment applied. Sectoral caps, entry routes, conditions, forms and time limits change by notification, press note and circular; later changes should be checked on the Gazette, DPIIT and Reserve Bank sites. This article is general information, not legal advice; check the official text before acting.