Sebi crackdown on employee benefit schemes via trusts may hit investors

Implementing employee benefit schemes through trusts has been a legally accepted concept for companies in India. Many companies use employee welfare trusts to implement various schemes, such as employee stock option or stock purchase plans, providing financial assistance, medical benefit, and so on, as it was feasible legally as well as administratively. However, in light of the rising concerns on insider trading and unfair trade practices, the Securities and Exchange Board of India (Sebi) appears to be losing faith in trusts.

The market regulator, in a circular in January 2013, prohibited listed companies from using the employee welfare trust route for framing any employee benefit schemes involving acquisition of own securities from the secondary market, a move which has been in the pipeline since its board meeting in August 2012. Companies that have already implemented such schemes prior to this circular would need to inform about the same to the stock exchanges within 30 days and align their existing schemes by 30 June 2013.

The Sebi's crackdown against employee welfare schemes through trusts has also come amid concerns that some companies may be funding these schemes to deal in their own securities with an aim to manipulate the share price by engaging into fraudulent and unfair trade practices.

Typically, companies tend to hold shares through trusts, taking shelter of employee incentive schemes to comply with the listing norms. There are inconsistencies in disclosure of such shares held by trusts. In some cases, these shares are disclosed under promoter group, whereas in other

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