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Sebi Panel Plans to Revamp Esop Rules

Companies may be allowed to purchase shares from the markets through trusts that administer stock- related employee benefit schemes after a Sebi panel proposed changes to existing rules.

The regulator on Wednesday said companies will have to take shareholders' approval for such purchases. Sebi had barred companies a year ago from acquiring shares from the secondary market through employee welfare trusts after it was felt that it could be misused by companies.

However, the regulator received representations from various industry bodies and companies citing difficulties in complying with the new rules. A committee was formed with representatives from corporates industry body and trustee firms to review the existing guidelines governing stock-related employee benefit schemes.

"It was felt that secondary market acquisitions by trusts being an internationally accepted practice should be considered subject to necessary safeguards to prevent misuse. It was also noted that secondary market acquisitions allow companies to grant options to employees without having to dilute their existing share capital," Sebi said in a discussion paper inviting public comments before December 5.

The Sebi panel also suggested this is crucial in cases where the option of expansion of capital base is not available to companies. "The proposals, if accepted, will provide greater flexibility to companies to structure their employee benefits schemes involving securities of the company," said Sudhir Bassi, executive director-capital markets, Khaitan & Co. "By allowing Esop (employee stock option plans) trust to acquire shares from the markets, companies can structure Esops and other employee benefit schemes without diluting the existing shareholders," Bassi said.

The regulator plans to replace the current guidelines with a set of regulations that will cover all kinds of employee benefit schemes involving securities of the company, composition of employee welfare trusts and disclosures.

"The checks and balances in terms of maximum holding, restriction on sale of shares, shareholder approvals, disclosures in annual report and classifying the trust as insider will act as a deterrent for misuse of this route," said Harshu Ghate, co-founder and CEO of ESOP Direct, a company that provides services in the space of equity-based compensation. Sebi also said a trust could acquire up to 2% of the paid-up capital in a year with a cap of 5% on the overall shares it can hold.

It would be treated as an insider and has to comply with insider trading regulations. The regulator said equity-settled stock appreciation rights (SARs) will now be allowed.

"Use of SARs will enable companies to optimise on dilution further and help employees since they do not have to invest their money but get the net appreciation," Ghate said.

Sebi also said that the trust holding will be treated as promoter holding for calculating the minimum 25% public holding threshold and to prevent its misuse as alternate modes for promoter holding. However, it will not have obligations of promoters with respect to lock-in and will not be treated as persons acting in concert. "Clubbing the holding of trusts with promoters for the purpose of calculating the public shareholding need to be reconsidered, especially in light of the fact that the trusts will be managed by independent trustees and will not have voting rights," Bassi said.

The regulator last issued guidelines governing stock-related employee benefit measures in 1999 to enable listed companies to reward their employees through stock options and stock-purchase schemes. These schemes can either be administered by the company itself or through a trust.

Economic Times, New Delhi, 21-11-2013