Last year, in case of
listed entities, SEBI noticed that many companies were framing their
own employees benefit schemes wherein Trusts were set up to deal in their own securities
in the secondary market which was not
envisaged within the purview of the ESOS Guidelines.
Subsequently, in January 2013, SEBI restrained
the listed companies from framing any employee benefit schemes involving
acquisition of own securities from secondary market apprehending any
manipulation in the company’s share prices by engaging in fraudulent and unfair
trade practices. Giving effect to the above restraint, SEBI also amended the SEBI
(ESOS & ESPS) Guidelines, 1999 and the Listing Agreement by way of
inserting therein new clauses 22B and 35C respectively.
SEBI further directed the listed companies,
which have already framed employee benefit schemes which are not in accordance
with the amended SEBI (ESOS and ESPS) Guidelines, 1999, to inform the details
of their scheme to stock exchanges and also to align such schemes with the
amended SEBI (ESOS and ESPS) Guidelines by June 30, 2013 which was later
extended to December 31, 2013.
Recently, vide its Circular No. CIR/CFD/POLICYCELL/14/2013, dated November 29, 2013
SEBI further extended the time line for said alignment of
existing employee benefit schemes to June 30, 2014 in light of the ongoing review of guidelines governing stock related
employee benefit schemes initiated by Discussion Paper issued by SEBI on
November 20, 2013.
Secondary market Acquisitions by Employees Welfare
Trusts – Underlying Issue
The Trusts set up for the
benefit of the employees may hold shares of the company both under ESOP and
Non-ESOP schemes. The objectives of the non-ESOP Trusts may be medical aid and
educational help to employees or/and their family, help to purchase residential
house, arranging Trips, Seminars or training for employees, etc.
Employee Welfare Trusts
set up are usually financed by the Settlor Company itself by way of advancement
of loan and managed/ controlled by the promoters of the Settlor Company
appointed as the Trustees. Through advancement of loan, the listed company is
funding the purchase of its own shares from the secondary market which is
prohibited by virtue of provisions contained under Section 77 the Companies
Act, 1956 (corresponding Section 67 of the Companies Act, 2013, yet to come
into effect) which, inter alia, restrains a company from buying back its own
shares or giving any loan, guarantee or providing security or any other
financial assistance in connection with purchase of or subscription to any
shares in the company or in its holding company. However, the restriction under
Section 77 does not apply, if the company provides funds to a Employee Welfare
Trust, pursuant to any such scheme for the time being in force for the purchase
of or subscription of fully paid up shares in the company or its holding
company.
Therefore, under the trust mechanism for administration
of ESOS, companies can provide funds/ financial assistance to the Employee
Welfare Trusts for acquisition of its own shares, either through subscription
to fresh issue or purchase from the secondary market.
Now, one of the issue
arises when the promoter(s)/ director(s)/ any other person(s) related to the
Settlor Company are appointed as the trustees for the management and
administration of the Employee welfare trusts including that of ESOS Trusts,
which gives rise to a conflict of interest. Since the promoters have
substantial financial interest in the company or the Directors may hold shares
in the company or possess insider information, there may be a possibility,
that in their capacity as trustees, they may deal in the company’s shares held
by the Trust 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 dealing in the company’s shares by the Trusts may also
raise regulatory concerns regarding compliance with SEBI (Prohibition of
Fraudulent and Unfair Trade Practices relating to the Securities Market)
Regulations, 2003 and SEBI (Prohibition of Insider Trading) Regulations, 1992.
Apprehending the above
possibility, SEBI prohibited the listed companies from framing any employee
benefit scheme involving acquisition of own securities from the secondary
market.
Prohibition from secondary market
acquisitions - Why?
§ The Promoters of the Settlor Company appointed as
Trustees exercise control over the securities held by the Trust and practically,
these securities actually become a part of the promoters’ shareholding. The Promoters
- Trustees can easily influence, in its favour, the voting rights exercisable
by the Trust in respect of the securities held by it.
§ Further, secondary market acquisition of shares by the
Employee Welfare Trust reduces the percentage of free float shares available to
the general public in the open market and indirectly, facilitates the promoters
to increase their control over the company.
§ Also in situations, where the Employee Welfare Trusts
are managed by the persons having interest in the Company’s shares, there is
the possibility of manipulation of share prices through purchase/ sale in the
secondary market to make personal financial gains. These financial gains would
be at the cost of the investments made by the genuine investors in the
company’s shares.
§ Since the listed company is providing funds by way of
loan to the Trusts, it’s management may try to exercise influence/control over
the decisions taken by the Employee Welfare Trust till such time the loan is
outstanding.
The prohibition issued by
SEBI aims to curb these possible malpractices which will ensure better
corporate governance and protection of shareholder’s wealth. However,
not all the Employee welfare Trusts set up and financed by the company,
directly or indirectly are engaged/ will engage in share price manipulation
activities.
* Employee Welfare
Trusts set up and financed by various companies are managed by independent
Trustees, who may be experienced professionals or reputed persons not related
to the company or companies offering Trusteeship services.
* Acquisition of
company’s shares from the secondary market by the Trusts is an internationally
accepted practice.
* Secondary market
purchases avoid dilution of capital and do not impact the value of existing
shares in the hands of shareholders like EPS, etc. This is very crucial and
important in cases where option of expansion of capital base is not available
to corporate or is not desirable from their perspective may be on account of
undesirable increase in capital base by issue of fresh shares, servicing a
bloated equity, etc.
Hence, keeping the above
in mind, it has become necessary that the acquisition of shares from the
secondary market by the Employee Welfare Trusts must be regulated by SEBI by
prescribing conditions and imposing terms of reference.
The way forward
In light of the representations received from various
industry bodies and companies, SEBI decided to
reconsider secondary market acquisitions by Employee welfare Trusts subject to necessary safeguards to prevent misuse instead of
imposing outright ban. For this reason, SEBI has
extended the time limit for the alignment of existing employee benefit schemes
with the amended SEBI (ESOS & ESPS) Guidelines, 1999 to June 30, 2014 and
also issued Discussion
Paper on 'Review of guidelines governing stock related employee benefit
schemes'.
Further,
SEBI plans to convert the ESOS Guidelines into Regulations having the force of law and
encompass all the employee benefit schemes
like i) ESOP ii) ESPS iii) SARs and iv) Employee Welfare Schemes which deal in
company’s securities under one regulation.
Highlight of the Recommendations
in the Discussion paper
1) Proposed regulations
shall cover all employee welfare Trusts,
whether ESOP or non-ESOP, dealing in company’s securities and such Trusts must be
set up, financed and managed by the Company, directly or indirectly.
2) Such Employee Welfare
Trusts shall be permitted to make
secondary market acquisition of shares subject to certain restrictions and
conditions.
3) Acquisition of
securities from secondary market would require shareholders’ approval which resolution shall clearly set out the
maximum percentage of shares that can be acquired by the Trust from the
secondary market. No approval of shareholders would be required if the
purchases are made by the Trust out of its own funds / income and no loans are
outstanding.
4) Recognition of Stock Appreciation Rights (SAR) Schemes under the
proposed Regulations.
5) There should be limits on secondary market purchases
for both ESOP and Non ESOP schemes:
Scheme Type
|
Yearly limit
|
Overall limit
|
ESOP Schemes
|
2% p.a. of the paid up
capital at the end of financial year
|
5% of the paid-up share
capital
|
Non-ESOP Schemes
|
-
|
2% of the paid-up share
capital
|
The
aforesaid ceilings shall be applicable for all the employee benefit
trusts taken together at the company level and not at the level of
individual trust, if a company has multiple trust and schemes.
6) Shares acquired by the
Trusts should have a minimum holding
period of 6 months otherwise than in case where the shares are transferred
to employees pursuant to exercise of options.
7) Necessary disclosures should be made under the Insider Trading Regulations for purchase/ sale of shares. No
purchase/ sale could be made during the Trading Window Closure Period.
8) Independent trustees must be compulsorily appointed at the
discretion of the Remuneration Committee of the company.
9) The shares held by Trust should be disclosed along with promoter holding as these shares are
not available to the public freely.
10) Any Trust/scheme which
is funded/managed/controlled by the company shall not be eligible to exercise voting rights on the shares of the
company held by them.
11) In the event promoter
holding in the company is already 75%, then the Trust cannot acquire any shares
from the secondary market to comply with the SEBI requirement of maintaining minimum public shareholding of
75% in all listed companies.
12) In case of Options
granted to an employee who has been
transferred or deputed to a fellow subsidiary / an Associate of the Company
prior to vesting / exercise, the vesting / exercise shall continue as per the
terms of the Grant.
13) Corporates will be
given a 2 years transition period to
migrate to the new Regulations.
For a detailed reading of the SEBI's Discussion Paper on "Review of Guidelines governing stock related employee benefit schemes", pls visit http://www.sebi.gov.in/sebiweb/home/list/4/23/0/0/Press-Releases
