Why Conventional ESOPs May Soon Loose their Sheen!!


On 15th January, 2015, the Capital Market Regulator, SEBI, came up with a new set of Regulations that overhauled a 23-year-old regulatory regime governing the arena of Insider Trading in the Capital Markets. Though the new Regulations seem to be more promising and equipped to ensure better compliance and enforcement, however at the same time the obligations attached, the sensitivity and penalty associated under the new insider trading norms have made it a reason to worry for the Corporates and particularly the Compliance Heads.


Assistant Vice President
The new regulations have certain grey areas that need a lucid visualization. One of the most talked about ambiguity that has been pulled out of the discussions and interpretation is the ESOP ISSUE-their Grants/ Exercise. The erstwhile Insider Trading Regulations, 1992, had made a separate room to keep the ESOPs in place with the statutory requirements of these Regulations. The earlier model code of conduct under Clause 3.2-6 of the Prohibition of Insider Trading Regulations, 1992, allowed exercise of options during trading window closure period. Further, SEBI via its replies to the FAQs also clarified that the restriction on opposite transaction (contra trade) would not apply to exercise of ESOPs.No such exemptions are available under the 2015 Regulations.Infact multiple restrictions on trading of shares and all inclusive definitions have dragged ESOPs into the wheel.

Worldwide, ESOPs are one of the most attractive & contemporary Employee Rewarding strategies being adopted by Corporate Houses. Even in Indian context, ESOPs have now reached the threshold and have now gained momentum as a part of the employee compensation package.

Under ESOPs, Employees are offered a certain share in the Company based upon their performance, loyalty and hard work, so that it gives them a sense of satisfaction & motivation that their efforts towards the growth of the Company are being recognized by the management. Also that a particular employee, whether a senior managerial personnel or not, is offered a pre-determined number of optionsthat correspond to a pre determinednumber of shares,at a pre determined price, that can be taken by that employee. Therefore, it is incorrect to assume that ESOPs grants/ exercise may lead to insider trading, since ESOPs do not allow employees to deal in shares of the company according to their sweet-will, their entire life cycle is pre fixed, by virtue of an ESOP Scheme, which is duly approved even by the Shareholders of the Company.

However, the rigidity of the new norms may render plain vanilla ESOPs unattractive. Perhaps the basic idea behind ESOP, i.e. providing lock in free shares to the employees at pre determined terms and conditionsmay get affected. This is because the management officials, who are usually in possession of unpublished price-sensitive information, will be able to exercise the ESOPs and take the shares to which they are entitled, only subject to pre clearance/ trading plan norms, as provided in the new PIT Regulations.

A fact worth noting is that exercise of ESOPs is simply making of an application by an employee to the company and collecting the shares. However, the term ‘trading’, as defined in the PIT Regulations, has been made to include“subscribing” as well. Accordingly exercise of ESOPs have also been including in the trading of shares of a company, which is disallowed, if done by the persons having access to UPSI.

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