How cos Bill will affect employee benefit schemes

Written by Pinky Khanna | Updated: Sep 17 2013, 18:11pm hrs
The much-awaited Companies Bill 2012 passed by the Lok Sabha in December 2012 has been approved by the Rajya Sabha. The Bill, with 470 Sections, will replace the more-than-five-decade-old Companies Act, 1956, to deal with contemporary issues such as corporate social responsibility, anti-fraud measures, women directors, corporate governance and investor protection, among others.

Until the Bill gets the assent from the President and becomes a law, it would be worthwhile to peak into the proposed provisions and identify their impact on Employee Stock Option Schemes (ESOS) and Sweat Equity shares (SE). In the Act, an ESOS is defined to include an option given to wholetime directors, officers or employees whereas the proposed definition of the Bill has done away with the words wholetime, which means the same is made more generic with an exclusion of independent director.

Independent director was not specifically defined under the Act and reference to it was drawn from the definition provided in the Listing Agreement. However, the Bill goes ahead and defines an independent director and also proposes restrictions on remunerating him by way of ESOS; SE continues to be defined in the Bill in similar fashion as under the Act. Also, the exception of issuing the shares as an SE at a discount continues to be proposed in the Bill as well, subject to specific regulation/rules to that effect.

However, in terms of any major changes in the Bill, considering the recent amendments by the Security Exchange Board of India (Sebi), prohibiting listed companies from using trust for framing any employee benefit schemes involving acquisition of own securities from the secondary market, there is not much to say. Thus, similar to the provisions of the Act, the Bill also allows financial assistance by public companies to the employee welfare trusts, which can purchase securities to implement an ESOS. However, unlike the Act, the Bill suggests that there would be certain requirements specified to that effect. Considering the amendments by Sebi, one could speculate something similar to be prescribed in the rules, to ensure sync.

Further, unlike the Act, the Bill has also proposed that company can issue shares to employees under an ESOS, however, subject to conditions as may be prescribed. Also, the proposed Bill specifies a requirement of having the shares valued by a registered valuer, subject to conditions as may be prescribed, wherein there is an ambiguity on whether the same is applicable to ESOS.

So, under the proposed Bill with everything being left open under the cover of to be prescribed, it would be a wait-and-watch approach wherein the suspense would unfold once the draft rules are prescribed. The same are expected to be rolled out for public opinion once the Bill receives its assent from the President.

The writer is senior tax professional, EY. Views expressed are personal.