Published Editorial

Sebi gears up to clamp down on shell employee benefit schemes

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The Indian Express

by

Pinky Khanna
Senior Tax Professional
EY

Following up on the representations made by the industry to the Securities Exchange Board of India (Sebi) on its circular issued in January 2013, the market regulator issued a fresh circular in May 2013.

In this circular, Sebi provided certain clarifications on the Equity Listing Agreement and the Sebi (Employee Stock Option Scheme and Employee Stock Purchase Scheme) guidelines, 1999 (Esop guidelines), that were amended vide its January circular. The January circular was issued to curb entities from framing schemes with the purpose of dealing in their own securities with the object of inflating, depressing, maintain or causing fluctuations in the price of securities by engaging in fraudulent and unfair trade practices.

The new circular now clarifies that the amended guidelines are applicable to all employee benefit schemes (including non-Esop benefit schemes) linked to securities of the company, where the company has direct or indirect control over the scheme or the trust/ agency managing the scheme.

It would also be applicable where the company has extended any direct or indirect financial assistance for the purpose of the scheme, or in case the company has set up the scheme or the trust/agency managing the scheme. The new circular now exclusively draws reference to non-grant of options to ineligible persons, as per the relevant clause of Esop guidelines, i.e., promoter/promoter group/director or his relatives holding directly or indirectly more than 10% of outstanding shares of the company (management group).

Such an exclusive reference to no-grant of any new options to the management group strongly indicates the regulator's intentions to identify and curtail shell employee benefit schemes, which are solely created to enable management groups to manipulate the market.

Vide the new circular, Sebi has also made a welcome move to allow companies implementing stock options or stock purchase schemes to continue holding securities acquired before January 17, 2013, under the employee benefit trust beyond December 31, 2013, especially benefiting companies whose securities have gone under water. However, such companies will have to ensure to align their schemes with the Esop guidelines.

Also, the new circular has imposed additional disclosure requirements for the listed companies with employee benefit schemes involving securities of the company, which are not in alignment with the Esop guidelines by 30 June 2013, in the prescribed annexures. While Sebi has made an attempt to bring clarity on certain aspects of the January circular, this circular does leave some ambiguity on as to how non-Esop employee benefit schemes, which involve dealing in securities in the secondary market and are now covered under the ambit of the circular, would comply with the Esop guidelines.