Recently I got an email from my company (US listed company) about ESPP program, which allows employees to purchase the company shares at discounted price. I started inquiring about ESPP with fellow colleagues and to my surprise everyone gave a thumbs up, indicating a simple and easy way to make money.
I have a habit of becoming suspicious whenever it sounds too good to be true. So I started digging further and here are some facts that I came up with.
What is ESPP?
Conceptually, ESPP is like a deferred-SIP, where you allow small amount to be deducted every month from your salary, during the offer period. Once the period is over, company will use the accumulated money to buy company shares at discounted price and deposit in your brokerage account.
Lets take a quick example, say you are employee of company XYZ Inc. The ESPP offer period is say 5 Nov 2014 to 5 May 2015. Lets say you applied for ESPP with a deduction amount of 5% (anywhere between 1 - 15%) every month starting November 2014. So on 5th May 2015, your company would have accumulated some money and it will purchase the shares of XYZ in your name. The discount given typically is 15% of lower stock price value of 5 Nov 2014 or 5 May 2015.
Assume, on 5 Nov 2014 stock price = 5$ and on 5 May 2015 stock price = 7$, you will get the stocks at 15% less of 5$.
Once the shares are deposited in your account, there are no restrictions and you can either hold them or sell them immediately.
It looks like a great program on paper with a straight 15% benefit and if the stock goes further up, your earnings will be much higher.
Where is the problem?
There are two problems associated with ESPP
1) Stock market risks
2) Tax and transaction charges
Let me explain, each one of them.
Stock Market Risks
Investment in ESPP is similar to investment in stocks & that too of a foreign listed stock. Any investment in stocks is associated with risks, if a stock can go up then as quickly it can come down and wipe your capital. As with investing in Indian stock market, you need to understand the financials and long term growth of your company. How many employees go through the quarterly results or historical financial data of their company? So just being an employee does not mean that your company's stock price will keep growing. Also being employee does not mean you have enough information to understand the future growth story of the company.
Tax and transaction charges
Indian Income tax laws can also be spoiler here. The first tax that will hit you, is when the company has purchased the stock on your behalf. The 15% discount that you are so happy about, it will be called as perquisite and taxed as per your tax bracket. So being in highest tax bracket (30%), your 15% discount immediately reduces to ~10% straight away.
Also for most employee idea of entering into ESPP program is to sell on the day of vesting (immediately following purchase). So when you sell the shares, assuming you make some gains. This will be short-term capital gains. There is also some brokerage charges taken by your broker (e-trade etc) which can also put a dent on your gains.
Since the shares are not listed in India, short-term capital gains are taxed as per your income tax slab. If you held the shares for long-term, then long-term capital gains are taxed at 20% for foreign listed shared.
I am not even considering the difference in Rs - $ conversion rate between the purchase date and sell date. It could potentially further dent your losses.
Conclusion
To me, ESPP has too many variables to consider for investment. I feel that ESPP for short term should be absolutely no-no, since it most probably will result in capital loss (unless your company share price jumped very high during the offer period). If you are very sure of your company's growth over a long period of time, then you may invest for long-term.
As for me, I am skipping the ESPP altogether and looking to find some gem in the Indian stock market.
No comments:
Post a Comment