Functioning of Employee Welfare Trusts- Now Regularized

Growth, development, and broadening horizons of business in India as well as overseas have awakened the entrepreneurs towards employee recognition and retention. Companies are extensively focusing on providing various kinds of benefits to their employees over and above the fixed salary.

Thought behind setting up Employee Welfare Trusts

Assistant Vice President
Organizations set up Employee Welfare Trusts in order to provide various kinds of benefits and incentives to their human assets. These benefits usually include medical benefits, educational benefits, provision for sports facilities, provisions for facilities for leisure, vacation & travel and it includes shares based benefits also. Listed entities create Employee Welfare Trusts, which acquire shares from secondary market and then these shares are either allotted to the employees in the form of stock options or resold in the market and the funds generated out of it is utilized for providing medical, educational & other benefits as the case may be. Earlier these Employee Welfare Trust were neither regulated by SEBI Guidelines nor by the provisions of Company Law. Since there was no regulatory regime to govern the functioning of Employee Welfare Trusts, therefore it resulted into continuous market transactions by such Trusts, thereby resulting into manipulative trade practices.

Market practices

The Market Regulator, SEBI noticed that some listed entities were framing their own Employee Benefit Schemes wherein Trusts have been set up to deal in their own securities in the secondary market. This was being done with the object of inflating, depressing, maintaining or causing fluctuation in the prices of securities by engaging in fraudulent & unfair trade practices.

Remedial Action by Lawmakers

Taking into account all these apprehensions and in order to address the concerns over acquisitions of shares by Employee Welfare Trusts from secondary market, SEBI being the watchdog of capital market, decided to prohibit the listed entities from framing any Employee Welfare Schemes involving acquisition of own securities from the secondary market vide SEBI Circular dated 17th January, 2013.
However, the day by day increasing trend of the Corporates giving various kinds of benefits to their employees as a necessity to ensure survival in the dynamic global business environment, have forced the lawmakers to seek review of the erstwhile SEBI (ESOS & ESPS) Guidelines, 1999. It was felt that secondary market acquisitions by the Trusts, being an international accepted practice, should be considered subject to necessary safeguards to prevent misuse.
Therefore, SEBI took a welcoming step by floating SEBI (Share Based Employee Benefit) Regulations, 2014. Through these Regulations, SEBI has brought an end to the ongoing dilemma over allowance/disallowance on secondary market acquisitions. Now the same has been allowed, subject to certain conditions as stated in the new Regulations. These Regulations covered not only Share Based Employee Benefit Schemes but also governs several other kinds of Schemes such as
General Benefit and Retirement Benefit Schemes.

Prior to coming into effect of these Regulations, the makers of Companies Act, 2013, also recognized the need for the same and accordingly the provisions relating to Employee Welfare Trusts were introduced in Companies (Share Capital & Debenture) Rules, 2014. Hence Rule 16 of the said rules chalks down the specific provisions for provisioning of money for purchase or subscriptions of company’s securities by the Trusts, as the case may be.
A comprehensive checklist for the requirements and compliances prescribed for Employee Welfare Trusts under the SEBI (SBEB) Regulations, 2014, has been enclosed herewith, for your reference.

Our View

These new Regulations will ensure transparency in the operations of the Employee Welfare Trusts and will bring an end to the manipulative activities being undertaken by some of the entities. This move of lawmakers will foster the growth of business in India as well as overseas along with ensuring fair market dealings.
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