A close look at the Sebi guidelines, which were analysed in detail in this column earlier, reveals that, compared to other guidelines and regulations, considerable freedom has been given to corporates to introduce the schemes providing at the same time more than adequate disclosure and transparency. However, as often happens, there is not adequate coordination between the various types of legislations. In fact, as would be pointed out later in this article, there are certaincontradictions and inconsistencies between other guidelines and regulations of Sebi and the guidelines on ESOPs which may prove to be stumbling blocks for the smooth introduction of such schemes.

ESOPs are instruments which have been successfully introduced in other countries such as USA and UK. A look at the manner in which they are implemented there will reveal that they are successful only if there are buyback arrangements for stock options and shares issued under such schemes by the company itself. Of course, the fact that there are allegations that market prices are manipulated upwards to ensure high price for buyback from the executives is another issue altogether which is also being debated there. However, buyback provides easy liquidity for the holders of stock options and make such schemes attractive to the employees. In India, this fact was realised in the Companies (Amendment) Act 1999. In the legal provisions relating to buyback of shares, while negotiated or selected deals of buyback from agroup of people were not permitted, generally speaking, it was provided that buyback of securities issued under stock options could be made. A reading of the provision, however, reveals that only the securities issued stock options schemes to employees can be bought back. Several issues arise for this purpose.

Firstly, the question is whether buyback of shares issued under share purchase schemes would be eligible for buyback. The wordings of the provision are ambiguous. It is not clear whether the shares allotted on conversion of the stock options into shares would be eligible for buyback. Similarly, it is also not absolutely clear whether shares, and not stock options, issued under employees share purchase schemes would also be eligible.

It is also stated that stock options issued to "employees" would be eligible for buyback. Stock options can be issued also to directors who are not employees. Will such Directors would be eligible to take part in the buyback of stock options? This is an issue which couldcreate difficulties.

Note an added difficulty. The Sebi buyback regulations do not permit buyback of stock options and shares allotted under similar schemes specially and exclusively from employees. Such employees, therefore, will have to wait for a general scheme of buyback by the company from all shareholders where they can take part proportionately. This creates problems for both, the employees as well as the company. This is discussed in more detail later. As stated earlier, It is stated that "securities " issued under stock options scheme can be bought back. Can the stock options themselves be bought back? It appears, considering the wide definition of the term "securities", that it would also include stock options and therefore shares as well as stock options can be bought back under this provision.

Thus, it is clear that buyback of instruments under such schemes will face restrictions. However, this is position under the Companies Act only now let us see the position under the Sebi regulations forbuybacks.

It has been provided that buyback by listed companies shall comply with the Sebi regulations issued in this regard. A review of the Sebi regulations issued for this purpose reveals that, first of all, buyback by negotiated deals are specifically prohibited. Further, buyback of stock options or shares issued under stock options or shares issued under share purchase schemes are not permitted under these regulations. When these regulations were issued, the guidelines relating to ESOPs were not in place and it appeared that at the time of their notification, such guidelines would take care of buyback of instruments issued under such schemes also. However, that has not been the case. Thus, it appears that buyback of instruments issued under stock options or share purchase schemes will not be permitted and, as discussed earlier, the employees will have to wait for a general buyback under which they, like any other shareholders, can take part. This will make ESOPs quite unattractive.

Another set ofSebi regulations that employees will have to keep in mind for possible conflict in the future are the Sebi insider trading regulations. As is known, these regulations seek to prohibit and punish trading in securities of a listed company by those who have close contact with the company and who have access to unpublished price-sensitive information using which they may seek to profit usually at the cost of the public or other shareholders. Under ESOPs schemes, employees would acquire shares and it is likely that they, to encash their holdings, may sell the shares. They will have to take care to ensure that they do not sell the shares on the basis of unpublished price-sensitive information. Companies will also have to introduce internal guidelines to prevent such occurrences. At the very least, all dealing in shares by employees may be required to be reported to the company forthwith.

Finally, it can be seen that Sebi has permitted companies to issue securities under such schemes directly to the employees. Inother words, intermediary trusts, which are so conveniently used in other countries, will not be permitted except to a limited extent. This will restrict flexibility by the companies in introducing such schemes.

In conclusion, it appears that though ESOPs can legally be put in place now, some changes in the principal and related laws is needed to make the schemes more attractive.

The author is a Mumbai-based chartered accountant