Valuation of specified security or sweat equity shares.

Valuation of specified security or sweat equity shares.


Valuation of specified security or sweat equity shares
Providing with stock option is one of the big incentives given to employees to continue their stay in the organization. Stock option or sweat equity shares are shares of the company issued to the employee at low rate so as to keep them motivated. Giving a Lower rate means giving an incentive. Let’s see the taxability of these incentives in hands of employees.
The amount taxable in the hands of the employee would be difference between the Fair Market Value and the amount at which the security is made available to the employee.

The fair market value of the option as on the date of exercise of the option by the employee is to be taken. The same shall be calculated as follows.

If shares are listed on recognized stock exchange –

In a case where the share in the company is listed on a recognized stock exchange on the date of the exercising of the option the fair market value shall be: The average of Opening and Closing Balances at the stock exchange.

The question is which stock exchange price is to be taken in case shares are listed in more than one stock exchange?

In such cases the fair market value shall be the average of opening price and closing price of the share on the recognised stock exchange which records the highest volume of trading in the share.

In case no trading is being done on the exchanges in whole day the fair market value shall be—

the closing price of the share on any recognised stock exchange on a date closest to the date of exercising of the optionand immediately preceding such date; or

the closing price of the share on a recognised stock exchange, which records the highest volume of trading in such share, if the closing price, as on the date closest to the date of exercising of the option and immediately preceding such date,is recorded on more than one recognized stock exchange.


“Closing price” of a share on a recognised stock exchange shall be the price at which last settlement was made at the stock exchange. Make sure that where the stock exchange quotes both “buy” and “sell” prices, the closing price shall be the “sell” priceof the last settlement.

“Opening price” of a share on a recognised stock exchange shall be the price of the first settlement on such date on such stockexchange. Make sure in case the stock exchange quotes both “buy” and “sell” prices, the opening price shall be the “sell” price of the first settlement.


If shares are not listed on recognized stock exchange –

All what we have discussed above is in case the shares are listed in any one of the recognized stock exchange. In case shares are not listed in any of the stock exchange fair value is to be calculated as follows.

The fair market value in such cases shall be such value of the share in the company as determined by a merchant banker on the specified date.

The word specified date is described as under:

  • the date of exercising of the option; or
  • any date earlier than the date of the exercising of the option, not being a date which is more than 180 days earlierthan the date of the exercising.


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