Sebi’s revised ESOP norms welcome step

Published: November 11, 2014 12:49:18 AM

In recent times, stock-based incentive schemes have increasingly been used by companies...

In recent times, stock-based incentive schemes have increasingly been used by companies as a compensation tool. With a view to improve the governance and transparency of such schemes, the Securities and Exchange Board of India (Sebi) has notified Share-Based Employee Benefits Regulations 2014 on October 28, 2014 replacing the existing Esop guidelines that were in place since 1999. The objective of the regulations is to facilitate smooth operation of such schemes, prevent any malpractices carried out in the name of ESOPs and align the provisions with the Companies Act, 2013.

The market regulator has widened the coverage of the types of schemes to include the Stock Appreciation Rights Scheme, General Employee Benefits Scheme and Retirement Benefits Scheme in addition to the traditional Employee Stock Option Scheme and Employee Stock Purchase Scheme. That such schemes can now be granted to employees of associate companies as well is a welcome step. On the other hand, independent directors have been excluded from the definition of ‘employees’.

Clarification on secondary market acquisition
In the recent past, Sebi had barred listed entities and their trusts from purchasing their own shares from the secondary market; however, it has now given a go-ahead for secondary market acquisitions that have to be mandatorily implemented through the trust route. As a safeguard, overall and yearly limits on quantum and holding periods for shares held by the trust under secondary acquisition have been prescribed. If the scheme is to be implemented through a trust, the same has to be decided upfront at the time of taking approval of the shareholders.

Enhanced disclosures

Several other protective measures have been incorporated. These include stricter disclosures and other regulatory obligations such as prior approval of shareholders to acquire shares from the secondary market, filing of trust deeds with stock exchanges and disclosure of shareholding of the trust as non-promoter and non-public.

To ensure a smooth transition for complying with the new regulatory framework, all listed companies that have existing employee benefit schemes to which new regulations apply have been provided with a time period. The period is one year from the date of these regulations coming into effect, subject to a few exceptions wherein a longer transition period of five years has been provided for.

In the light of the abovementioned developments, employees may soon expect some variations to stock-based incentive plans under which they are covered. As a way forward, listed companies that have such schemes dealing with shares are required to review the existing schemes and align them with the new regulations within a year from the date of their applicability. Also, listed companies proposing to implement such schemes should ensure compliance.

While we await some clarifications from Sebi on certain clauses, the new regulations are likely to bring an end to the manipulative activities undertaken by some listed companies under the cover of ESOP trusts.

Paras Doshi

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

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