Companies that formed trusts under the guise of employee benefit schemes to deal in their own shares have started falling in line after capital market regulator Sebi clamped down on such structures. The recent past has seen many prominent listed entities disclosing that they indeed have such trusts while assuring complete regulatory compliance within the stipulated deadline.
According to stock exchange disclosures, companies like Piramal Glass, Inox Leisure, Piramal Life Sciences, JSW Steel, Mahindra Finance, Blue Star Infotech, Jubilant Life Sciences, Dalmia Bharat and Take Solutions, among others, have all formed trusts for employee benefit schemes.
The roots of the matter go back to January 17 when Sebi issued a circular stating that trusts formed under employee benefit schemes are being used to deal in the company’s own shares. “It has come to the notice of Sebi that some listed entities have been framing their own employees’ benefit schemes wherein trusts have been set up to deal in their own securities in the secondary market,” said the circular.
Sebi is of the view that some companies have framed such schemes to deal in its own shares “with the object of inflating, depressing, maintaining or causing fluctuation in the price of the securities by engaging in fraudulent and unfair trade practices”.
Interestingly, some companies have said that they believe that their trusts are in compliance with the law as they are not used to deal in the company’s shares.
They, however, added that if required by Sebi, they will sell the shares in the market or transfer the same to the employees within the deadline of June 30.
Inox Leisure, for instance, has said that it proposes to “amend the trust deed so as to bring it in line with Sebi (ESOS and ESPS) Guidelines”. Piramal Glass, on the other hand, said that while it feels that the company’s ESOP trust is fully compliant with the law, any requirement of selling the shares in the open market “pose several difficulties and hardships”.
Jubilant Life Sciences has clarified that shares to the extent of options exercised will be transferred to employees on or before June 30, while the balance shares will be sold/transferred to employees or otherwise dealt with by the Trust in a legally permissible manner. Mahindra Finance feels that the provisions of the Sebi circular does not apply on it as the trust “has not acquired any shares from the secondary market”.
Legal experts say while it is illegal for companies to deal in their own shares, the law provides for exemptions that are misused by many. RS Loona, a former Sebi executive director, says trusts dealing in shares of the company are “not in accordance with the spirit of the law” that forced Sebi to act.
“While Section 77 of the Companies Act prohibits any company from dealing in its own shares, sub-section (2)(b) provides an exemption for trusts formed for the welfare of employees,” says Loona, who is currently the managing partner of Alliance Corporate Lawyers.
Sebi, meanwhile, adds such a structure can pose regulatory concerns and could be non-compliant with provisions of the law governing insider trading and fraudulent and unfair trade practices.