Foreign ESOPs: Valuable, Illiquid, Tax-Inefficient & Tricky

Introduction

India now hosts over 2000 Global Capability Centers (GCCs). These GCCs employ over 2 million people, many of whom are employed in roles involving cutting edge Technology & Finance. Almost all foreign-listed parents (Microsoft, Google, Amazon, JPMorgan, Goldman, Walmart) grant RSUs (Restricted Stock Units) and ESOPs (Employee Stock Options) to their Indian employees on globally uniform terms. Such equity compensation is typically 30-60% of total compensation for senior executives working in these GCCs run by multinational companies. As a result, the total value of these ESOPs held by Indians working in GCCs runs into several tens of billions of dollars, far exceeding the value of ESOPs held by Indians in Indian listed companies.

Microsoft, Amazon, Alphabet Inc. (Google) JP Morgan Chase are constituent holdings within the Marcellus Global Compounders Portfolio, a strategy offered by the IFSC branch of Marcellus Investment Managers Private Limited and regulated by the IFSCA. Accordingly, Marcellus, its employees, their immediate relatives, and clients may maintain interests or positions in these securities. Any reference to these companies is intended strictly for informational and educational purposes within the context of this discussion and should not be construed as investment advice.

The problem: Undue concentration in tax-inefficient ESOPs

What we are observing in the portfolio reviews that we do for our clients is that while the older generation is over-indexed on real estate, the newer generation is over-indexing on ESOPs and RSUs which they receive as part of their compensation. In other words, while one generation is locked into physical assets, the next is getting locked into financial assets in the form of equity from their own employers.

Global wealth managers like Fidelity and JPMorgan Private Bank flag any single stock above 5-10% of net worth as a problem requiring active management. We’re increasingly seeing investment portfolios, especially of senior professionals in tech, fintech, and quick commerce companies, where 30–70% of their net worth is tied to one company’s stock in the form ESOPs or restricted stocks RSUs.

Stock as percentage of total compensation

We are emotional beings, and as we keep seeing again and again – emotions come in the way of rational decision making. In investing this comes in the form of behavioural biases.

Any rational investor would know that having 30% or more of your wealth ties to a single stock is not smart investing. But the familiarity bias says – “I know my company really well, so it must be safe”. The recency bias says, “it’s done well, so it will continue to do well”. The status quo bias says – “Oh to sell or not is a big decision – so let’s just leave it as is for now”.

And the concentration is not just of value of the ESOP. The employee’s human capital i.e. salary, bonus, career is already fully concentrated in that company. So, it’s mega concentration of both the employee’s existing and future wealth in a single company.

Challenge #2 with ESOPs in foreign companies: Tax aversion

There is an element of tax incidence when the employee exercises or sells her stock options. Because this tax impact results in a cash outflow right now, most of us remain averse to it. In fact, this tax impact has multiple layers to it in the case ESOPs in companies listed abroad.

Firstly, Capital Gains Tax (CGT) on foreign stocks is at an employee’s maximum marginal rate if these investments are sold in less than 2 years. For senior employees, the maximum marginal rate can be as high 42% – a rate high enough to make most investors procrastinate.

Secondly, unlike India, many developed economies have Estate Duties or Inheritance Taxes which have to be paid by the inheritors when the owner of the assets dies. For example, the heirs of Indian residents holding direct US shares above $60,000 in value can face up to 40% US estate tax on death. We have seen first-hand how difficult and time-consuming this process can be for Indians living in India trying to pay Estate Duties in America on shares in American companies.

Challenge #3 with ESOPs in foreign companies: Not wanting to abandon US$ linked compounding

Over the past decade, the S&P 500 has compounded at 15% p.a in US$ terms whereas the Nifty 50 has compounded at a mere 6.5% p.a. Indian employees of the global tech giants having seen decadal compounding in excess of 20% p.a. in $ terms are naturally reluctant to move their assets into India for fear of missing out on further compounding in US$ assets. This aversion to sell US$ assets is even greater for those Indians who expect to see their children to go to college in America. In their mind, their US$ denominated ESOPs are effectively their children’s college fund.

Marcellus’s ‘MAP-Balanced’ which has delivered 8.34% returns since inception in Aug-24 to April-26 net of all fees and costs against 1.47% of Nifty 500 TSR (see the chart below).

Source: Marcellus Investment Managers; Marcellus Performance Data shown is net of fixed fees and expenses charged till 31st March 2026 and is net of Performance fees charged for client accounts, whose account anniversary / performance calculation date falls upto the last date of this performance period; Returns more than 1-Year are annualized; other time period returns are absolute. For relative performance of  particular Investment Approach to other Portfolio Managers within the selected strategy, please refer to https://www.apmiindia.org/apmi/welcomeiaperformance.htm?action=PMSmenu.  The calculation or presentation of performance results in this publication has NOT been approved or reviewed by the SEC, SEBI or any other regulatory authority.