An NCLT scheme disrupts the employment relationships, and the transferee company may lose key employees who are uncertain about their future. The retention of key employees is a critical success factor, and it requires a legal and tax analysis that goes beyond the standard employment contract.
The Retention Mechanisms
The transferee company may use retention bonuses, stay bonuses, ESOPs, or long-term incentive plans to retain key employees. The retention agreement should specify the retention period, the payment trigger, the clawback conditions, and the employee’s obligations. The agreement should be consistent with the scheme’s employee-protection clause.
The Tax Treatment
A retention bonus is taxable as a perquisite under Section 17(2) of the Income-tax Act, 1961, and it is subject to tax deducted at source. The timing of the taxation depends on whether the bonus is paid at the beginning, during, or at the end of the retention period. The employee may be eligible for a relief under Section 89 where the bonus is received in a lump sum.
The ESOP Continuity
Where the transferor company has granted ESOPs, the scheme should address the treatment of the unvested and vested options. The transferee company may assume the options, substitute them with its own options, or cash them out. The treatment has tax and FEMA consequences, and it should be disclosed in the scheme.
The Harmonisation
The transferee company should harmonise the terms and conditions of the transferred employees with its own policies. The harmonisation should be communicated in advance, and it should be implemented in a manner that does not breach the scheme’s protection.
A technically sound retention strategy is integrated with the scheme’s employee-transfer plan, and it addresses the legal, tax, and communication dimensions.
Call to Action
Anuj Desai & Associates advises companies on key employee retention in an NCLT scheme—from the retention agreements and the tax treatment to the ESOP continuity and the harmonisation of the terms. If your scheme involves a critical workforce, we can help you structure the retention plan.
📧 office@anujdesaiassociates.com
📞 9619456656
🌐 https://anujdesaiassociates.com
🔗 linkedin.com/in/ca-anuj-desai-122547230
Article 264