29 May 2013 2013mber 2012 EY Alert Clarifications provided by SEBI on circular prohibiting framing of employee benefit schemes involving acquisition of shares from the secondary market Executive summary In our earlier alert issued in February 2013, we had highlighted that the Securities and Exchange Board of India ( SEBI ) had vide its Circular dated 17 January 2013 ( Earlier Circular ) amended the Equity Listing Agreement and the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 ( ESOP Guidelines ) prohibiting listed companies from framing any employee benefit schemes involving acquisition of own securities from the secondary market On 13 May 2013, SEBI issued another circular ( New Circular ) to provide clarifications on its Earlier Circular. Through this New Circular, SEBI has: Provided clarifications on its Earlier Circular; Amended the Equity Listing Agreement; and Mandated additional disclosure requirements The circular has been posted on the SEBI s website and can be downloaded by accessing the following link: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1368445559640.pdf
Background The SEBI had vide its Earlier Circular amended the Equity Listing Agreement and ESOP Guidelines prohibiting listed companies from framing any employee benefit schemes involving acquisition of own securities from the secondary market. This was done under the apprehension that some entities frame such schemes to deal in its own securities with the underlying objective of manipulating the price of its securities by engaging in fraudulent and unfair trade practices. Representations were made by various impacting parties/ associations/ chambers to SEBI seeking clarifications on the applicability of the Earlier Circular and continued holding of securities already acquired by employee benefit trusts before the date of the Earlier Circular, beyond the earlier deadline of 30 June 2013. In order to address the above, SEBI has vide its New Circular issued certain clarifications. Key Updates A. Applicability of the Earlier Circular The Earlier Circular is applicable to all employee benefit schemes involving the securities of the company wherein Trust has been set up to deal in their own securities in the secondary market. Now it is clarified that the Earlier Circular is applicable to the company which has: set up the scheme or the trust/agency managing the scheme; or direct or indirect control over the affairs of the scheme or the trust/agency managing the scheme; or extended any direct or indirect financial assistance to the employee benefit schemes or the trust/agency managing such schemes. B. Extension of time for alignment of employee benefit schemes with the ESOP Guidelines Clause 35C (ii) of the Equity Listing Agreement has been amended to extend the time line for aligning existing employee benefit schemes with the ESOP Guidelines to 31 December 2013 from 30 June 2013 as prescribed by the Earlier Circular. However, options granted post 17 January 2013 should be strictly in accordance with ESOP Guidelines. Further, the circular has exclusively drawn reference to non grant of options to ineligible persons as per clause 4.2 and 4.3 of ESOP guidelines, i.e. Promoter/ Promoter group/ Director or his relative holding directly or indirectly more than 10% of outstanding shares of the company ( Management group ). C. Holding securities by Trusts beyond 31 December 2013 Employee benefits trusts having acquired securities of the company from secondary market before 17 January 2013, may continue to hold such securities beyond 31 December 2013, provided: The schemes have been aligned with ESOP Guidelines; and Such securities are used only in accordance with such aligned schemes. D. Continued holding of securities by non- ESOP employee benefit schemes Existing Employee schemes involving securities of the company which does not involve granting of options to employees / purchase of securities by employees shall be permitted to Hold such securities already acquired beyond 31 December 2013, provided the schemes have been aligned with ESOP Guidelines; Else, dispose off the securities of the company held by them on or before 31 December 2013. E. Requirement for additional disclosures In addition to the requirements already mandated by the Earlier Circular, as set out below, listed companies with employee benefit schemes, involving securities of the company, which are not
in alignment with ESOP guidelines, shall disclose the following information to the stock exchanges by June 30, 2013 in the prescribed Annexures I and/or II and/or III. Comments Earlier, employee welfare schemes (including stock appreciation schemes), implemented by listed companies that did not involve fresh issue of securities of the company, based on the strict technical interpretation, did not fall within the scope and ambit of the ESOP Guidelines. However, the New Circular aims to bring such employee welfare schemes under its purview indicating that employee welfare schemes are also covered by the ESOP Guidelines if it involves dealing in own securities. Exclusive reference to non grant of any new options to Management groups strongly indicates regulator s intentions to identify and curtail shell employee benefits schemes which are solely created to enable Management groups to directly or indirectly control the affairs and manipulate the market. It is a welcome move to allow companies implementing ESOS or ESPS schemes to continue holding securities acquired before January 17, 2013 under the employee benefit trust beyond December 31, 2013 especially benefitting companies whose securities have gone under-water. However, they will have to ensure to align their schemes with the ESOP Guidelines. Alignment of non-esop schemes to ESOP Guidelines still remain an ambiguity as the terms and conditions of non-esop schemes will be completely different from ESOP Guidelines. Based on the above ambiguity, further clarification/ amendment to ESOP Guidelines can be expected from SEBI. Next Steps Listed Companies with Employee Stock Option Scheme/ Employee Stock Purchase Scheme Listed Companies with Employee Stock Option Scheme and/ or Employee Stock Purchase Scheme which involves dealing in securities in the secondary market should reevaluate their existing schemes to ensure that they are compliant with the ESOP Guidelines such as ensuring that vesting period of minimum 1 year is mandated by its scheme, shares/ options are not issued to the Management group, prescribed accounting treatment of options granted before and after January 17, 2013 is followed, etc. Companies should also check if they have maintained appropriate documentation to substantiate that they are fully compliant with the ESOP Guidelines. Listed Companies with non-esop employee benefit schemes Listed Companies with non-esop employee benefit schemes which involve dealing in securities in the secondary market should identify the relevant clauses within the ESOP Guidelines with which such schemes are compliant or can comply with such as non provisions of benefits to Management group, approach SEBI to determine the following: how to be fully comply with the ESOP Guidelines; and get clarification if compliance with certain specific clauses of the ESOP Guidelines would amount to being fully compliant for such schemes. Separately, appropriate disclosures as mandated by both the circulars should be made by companies within the stipulated time lines in the manner prescribed, to avoid any hardships in the future.
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