Restriction on ESOP Trusts for Secondary Market Purchases

SEBI, vide its Circular dated January 17th 2013 has come out with an amendment to the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 and a consequent amendment to the Equity Listing Agreement as well.

Ms. Anjali Aggrawal
Vice President
SEBI through SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 provides an orderly framework for the listed companies to reward their employees through stock option schemes and stock purchase schemes. These regulations contain detailed provisions, with regard to any ESOP/ ESPS scheme of a listed entity. Whereas it was observed by SEBI that some listed entities, while framing their ESOP Schemes had created the Trusts to deal in their own securities in the secondary market, which was not envisaged within the purview of SEBI (ESOS and ESPS) Guidelines 1999. Thus, it has been decided to prohibit the listed entities from framing any employee benefit schemes involving acquisition of own securities from the secondary market. Also clause 35C has been inserted in the Equity Listing Agreement for the same.
Corporates are aware that ESOPs can be issued either under the Direct Allotment Route or through the Trust Route. Under the Direct Allotment route, as the name suggests, direct fresh allotments are made to employees, as and when they exercise the Options. As against this, in the Trust Route, the Companies were either making fresh allotments to the Trusts or authorizing the trusts to acquire/ buy the shares from the market as and when deemed appropriate, to be ultimately transferred to the concerned employees, as and when they exercise the options.

The amendment is with reference to the latter type of transactions, involving acquisitions by the Trusts from the secondary markets.

The said amendment has been brought out with the obvious apprehension that such Schemes/ Trusts might have been created with the object of inflating, depressing, maintaining or causing fluctuation in the price of the securities by engaging in fraudulent and unfair trade practices. Such dealings also raise various regulatory concerns regarding compliance SEBI (FUTP) Regulations as well as Insider Trading Regulations.

It has also been mandated that those companies, which have already framed and implemented before the date of this circular any employee benefit schemes involving dealing in the securities of the company, which are not in accordance with the SEBI Guidelines, such companies will be required to inform the details of their schemes to the Stock exchanges within 30 days from date of the circular (in the prescribed format) and shall also align any existing employee benefit schemes with SEBI (ESOS and ESPS) Guidelines on or before 30th June 2013.

It can thus be inferred that from now on, the Employee Welfare Trusts will not be allowed to acquire any shares from the Secondary Market and can only be issued fresh shares, for being transferred to the Employees, as and when they exercise the Options vested to them. Furthermore, any such Schemes/ Trusts in existence will have to be accordingly amended to be in consonance with the SEBI Guidelines by 30th June 2013.

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