Employee benefit schemes, including employee stock options (‘ESOPs’) and employee stock purchase schemes (‘ESPS’), are used by companies to incentivize employees with a view to attract and retain talent by organizations. As per the SEBI (ESOP & ESPS) Guidelines, 1999 (‘Guidelines’), an ESOP/ ESPS may be administered directly by the company or through a trust mechanism. SEBI has issued a discussion paper on ‘review of guidelines governing stock related employee benefit schemes’ in light of certain practices that have been brought to its notice.
SEBI has been concerned for some time now about ESOS / ESPS trusts of certain listed companies that deal in their own securities in the secondary market, which is outside the purview of SEBI Guidelines. A circular dated 17 January 2013 was issued by SEBI amending the equity listing agreement and the SEBI Guidelines to restrict this practice, as it apprehended that some companies may frame such schemes to deal in their own securities to inflate, depress, maintain or cause fluctuation in the price by engaging in fraudulent and unfair trade practices. The amendment required that all employee benefit schemes already framed and implemented by companies involving dealing in securities before 17 January 2013 be aligned with and made to comply with SEBI Guidelines on or before 30 June 2013. A circular dated 13 May 2013 was issued by SEBI which gave companies time till December 2013 to bring their employee benefit schemes in line with SEBI Guidelines. In light of the discussion paper to review the stock related employee benefit schemes, SEBI has issued a circular dated 29 November 2013 extending the deadline further to 30 June 2014.
The Primary Market Advisory Committee (‘PMAC’) has also recommended that the functioning of employee benefit trusts be regulated by imposing certain restrictions such as: permitting only schemes set up as trusts to undertake acquisition of shares from secondary market; minimum share holding period of six months (except when the shares are handed over to the employee in accordance with the scheme); disclosure of the shares held by the trust under a separate head under promoter/promoter group category under clause 35 of the listing agreement; limit on such acquisition of shares (percentage of total share capital); treatment as insider including requirement to make all necessary disclosures; and appointment of an independent trustee to manage the affairs of the such trusts.
Another important recommendation envisages expansion of the regulatory ambit to include all non ESOS / ESPS employee benefit schemes which are either set up, managed or financed by the company directly or through a trust and deal in securities. They also recommend framing regulations to deal with Stock Appreciation Right Schemes, General Employee Benefit Schemes and Retirement Schemes dealing in securities. While these recommendations are in the right spirit, it is yet to be seen whether SEBI can effectively regulate the myriad employee benefit schemes.