SEBI proposes to revamp ESOP schemes

Updated: Thursday, November 21, 2013, 11:56 [IST]

The Securities and Exchange Board of India (SEBI) has proposed a revamp in the existing Employee Stock Option Plans (Esop) schemes and with it companies would be allowed to purchase shares from the secondary market through trusts administering such schemes. In lieu of the proposed amendments, the capital market regulating body on Wednesday stated that companies can purchase shares for Esop from open markets following shareholders approval.

The proposal has come in the backdrop of representation from several companies as well as industry bodies who found it difficult to adhere to the existing guidelines. As only a year ago companies had been prohibited to purchase shares for Esop through trusts from the open market by SEBI anticipating the misuse of such provision. However the discussion paper of SEBI awaiting public comments as quoted in one of the media reports said " It was felt that secondary market acquisitions by trusts being an internationally accepted practice should be considered subject to necessary safeguards to prevent misuse. It was also noted that secondary market acquisitions allow companies to grant options to employees without having to dilute their existing share capital".

The discussion paper proposed introduction of a comprehensive regulation that would include all of the employee benefit schemes, including Esop or Employee Stock Option Plan; ESPS or Employee Stock Purchase Scheme and SAR or Stock Appreciation Right.

Also, SEBI said companies will be able to make share purchase from the open market subject to 2% ceiling of paid-up capital in a financial year and total cap of 5% on the total number of shares that the company can hold. Even after hitting the ceiling, companies can grant stocks to employees by issuing fresh shares. For such shares purchased through ESOP trust from the open market, SEBI allows a maximum holding period of a maximum of six months. Nevertheless, after transfer of shares to employees the clause of holding period will no longer apply. Such employee benefit schemes will have to adhere to the insider trading regulations.

The proposal if accepted shall provide listed companies greater flexibility in structuring their employee benefit scheme. Also, as suggested by the SEBI panel, the step shall emerge to be crucial for companies which do not have the option to raise its capital base.

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