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ESOP Trusts in Listed Companies: An Analytical Review
1.  Background:
Retention of talented employees is essential for the growth and brand value of the company. The traditional methods of retaining and motivating employees are no more sufficient to fulfil the self-esteem needs of the Employees.
Employee Stock Option Plan (ESOP) is considered as one of the most contemporary and important tool to retain human assets of the Company and to reward the high potential employees. The feeling of ownership acts as a motivational boost for the employees to have long-term aspirations and association with the organisation.
Under ESOPs, the options based upon the eligibility criteria of the Employees, are issued to them, which an employee after the expiry of the specified period, can convert them into the equity shares of the company and participate in the ownership of the company along with the other shareholders.
ESOPs in the company can be issued either directly to the employees of the Company (Direct Route) or through an Employee Welfare Trust (Trust Route).
Under the Direct Route, as the name suggests, fresh allotments of the Equity shares of the company are made to employees, as and when they exercise the options. As against this, under the Trust Route, the Companies either make fresh allotments of the Equity Shares of the company to the Trusts or these Trusts, , were authorized to acquire/ buy the shares from the market as and when they deemed appropriate, and the Equity Shares, so allotted or acquired, by the Trusts from either of the ways, to be ultimately transferred to the concerned employees, as or when they exercise the options.
Further some companies also use TRUST to provide the finance facility to the employees in case at the time of exercise of options, they require fund to make the payments for the options.
Hence the Companies have substantial flexibility to design the ESOPs in any manner catering to their needs as well as the needs of the Employees, by using either of the alternatives or combination of both Direct Route and Trust Route.
For Listed Entities, SEBI through SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 provides an orderly framework to reward their employees through stock option schemes (ESOPs) and stock purchase schemes (ESPSs). The current guidelines, already provides enough room to the Companies to frame their Plans and use Trust to administer it.
However, it was observed by SEBI that some listed entities were taking advantage of these wider opportunities for framing the ESOP Schemes. As there was no restriction on the purchase of shares from the secondary market by the Trust for creating a pool of shares for transferring them to the Employees as and when they exercise, the Market Regulator observed that some companies had created the Trusts only with the intent to purchase and sell the shares in the Secondary market under the umbrella of the ESOP Scheme with the sole objective to inflate, depress, maintain or fluctuate the price of their own shares by engaging in fraudulent and unfair trade practices, which is a highly debarred act under the securities laws of the country.
Thus, SEBI vide its Circular dated 17th January, 2013 came out with an amendment in the SEBI (ESOP and ESPS) Guidelines, 1999. Pursuant to the said amendment, SEBI has restrained the Trust of listed entities to buy shares from the secondary market for creating a pool of shares for the ESOP Schemes, and has mandated all listed companies having operational Employee benefit schemes involving purchase of shares by Trust from open market, to align their schemes as per the amendment and has further directed to undertake one-time reporting of certain details vis-Ã -vis the scheme and dealings in secondary market by the Trusts within a period of 30 days from the date of the said circular as per the prescribed format.
2.   Our Analysis:
Our analysis is based on the corpus of disclosures filed with the Stock Exchange(s) as per the SEBI´s directive, by 30 Listed Entities who have active Employee Welfare Schemes and/ or Trusts. On analysing the disclosures filed by the Listed Entities, we observed that:
  • Approximately 66% of such Companies have formulated Employee Welfare Trust to purchase shares from the secondary market instead of fresh allotment to the Trust.

    On analysing the trend related to secondary market purchase by the Employee Welfare Trusts, it can be inferred that although the prime objective of all these Trusts is to purchase shares from the secondary market for transferring benefits at later stage to the Employees of the Company. But, simultaneously, the Trusts might also be selling these shares in the secondary market during the due course of time that may directly or indirectly influence market stability and share prices of the company on the Stock Exchange(s). These kinds of share transactions were leading to creation of a false market.
  • Approximately 36% Companies have formed the Employee Welfare Trusts with no backing of ESOP Schemes:

    Almost 36% companies have reported that though they have established Employee Welfare Trusts but they don´t have actual operational ESOP schemes. The fact that the ESOP Trust are currently undertaking transactions under the cloak of using them in future under ESOP Scheme clearly highlights the fact that they were being formed not with the real motive of transferring shares/benefits to the Employees but are being used for purposes totally different than employee welfare
  • Quite interestingly, approximately 23% of such Companies have Non-Independent Employee Welfare Trusts and out of which only approx. 21% of such Trusts are been supported by ESOP Scheme.

    To further elaborate this point, Non-Independent Employee Welfare Trusts are the Trusts formed for the Employees´ benefit but are been regulated by the Promoters of the company in the capacity of Trustees of these Trusts. Also as per the disclosure norms of the SEBI, the identity of the Trustees is the identity of the Trusts.

    From the disclosures filed, it has been observed that approximately 79% of the Companies with Non-Independent Employee Welfare Trusts have actually no operational ESOP scheme and inference can be drawn that these Trusts are merely acting as marionettes which are being used for dual purposes, on one hand as a device to facilitate transfer of shares upon exercise of options by the Employees in future , on other hand can also be used to safeguard the Promoters Interest in the company.

    Furthermore many of these companies are not showing these Employees Welfare Trust as part of Promoter Group, which again is also a wrong disclosure as per the SEBI disclosure norms.

    The above mentioned Analysis can be depicted with the help of the following diagram:

    From all the above, it is very clear that the aforesaid practices are not in line with the intents of the law makers as the Employee Welfare Trusts are being used as portfolio managers for the Promoters, which, for obvious reasons, is a non acceptable proposition.
3.   Options made available with the Companies/ Trusts as per SEBI Circular dated 17th January, 2013:
  3.1. The pertinent question that arouse after this circular came into force was what options would be available to the Companies/ Trusts that are already in existence and which, till now, had been doing market acquisitions.
    With the objective of aligning the existing Employee Welfare Schemes and working of the Employees Welfare Trusts, SEBI itself, vide the said Circular, had prescribed the following two modes for diluting the shareholding acquired by the said Employees Welfare Trusts from the Secondary Market by 30th June, 2013:
3.1.1. by transferring shares to the Employees covered under the ESOP/ESPS Scheme; or
3.1.2. 3.1.2 by selling the shares in the secondary market thereby transferring the benefits of the Employees.
  3.2. How the Companies proposed to deal with the said shares held by the Employee Welfare Trusts after the Circular dated 17th January, 2013:
3.2.1. On analysing the disclosures filed by the listed entities, it was observed that majority of the companies (appx. 82%) have planned to dilute or to sell the Trust shares in the secondary market through Stock Exchanges.
3.2.2. Another set of approximately 16% of such listed entities have planned to approach the Market Regulator either for :-
(a) seeking a clarification with regard to disposal of shares mainly acquired by the Employee Welfare Trusts pursuant to any scheme of merger or transfers received from the Trusts of Holding/ Subsidiary Company or through any other mode including market purchase also; and/ or,
(b) for extension of time from the 30th June, 2013 for diluting entire stake held by Employee Welfare Trusts.
  3.3. Shortcomings in the mode suggested by SEBI vide Circular dated 17th January, 2013:
    SEBI had although suggested the way outs for such Trusts but in our opinion, under both the options suggested by SEBI, there were certain fall outs, which might need to be addressed by the Regulator. For instance, if a Company goes in for option 1, i.e. transferring the shares to the employees, this option would depend upon the life cycle of the ESOP Scheme of the concerned Company. If the Vesting/ the Exercise Periods have not expired, the transfer of shares to the employees would not be feasible.
    Likewise, for the 2nd option, i.e. selling the shares in the Secondary Market, if the said Trusts put in a large stock for sale in the market, the running scrip prices would plunge down, thus resulting in fall in the market capitalisation and various other related issues which can be sighted as a major peril for the capital markets.
    Further, the 2nd option may raise various concerns related to accounting aspect for the substantial loss or gain that may arise on account of bulk selling of the shares by the Trusts.
  3.4. SEBI´s initiative to address the apprehensions related to Circular dated 17th January, 2013:
    SEBI vide its Circular dated 14th May, 2013 has addressed various representations seeking clarification on the applicability of the Circular dated 17th January, 2013 and the shortcomings in the modes suggested for dilution of shareholding by the Trusts.
    SEBI, keeping in view the representations received, has extended the time-frame for aligning the scheme in consonance with the SEBI (ESOS & ESPS) Guidelines, 1999 from 30th June, 2013 to 31st December, 2013 with a stipulation that any further grant post Circular dated 17th January, 2013 shall be strictly in accordance with the SEBI Guidelines.
    By appreciating the concerns that have a direct bearing on the Capital Market and at the public at large, SEBI has allowed Trusts to hold the Securities acquired prior to 17th January, 2013 beyond the date specified for alignment of the schemes provided that the schemes have been aligned with SEBI (ESOS and ESPS) Guidelines 1999 and such securities are used only in accordance with such aligned schemes.
    SEBI has further mandated the Listed Entities to disclose further details related to the Schemes to the Stock Exchanges by June 30, 2013 and in order to keep an eye on the listed entities, has further casted a responsibility on the listed entities to submit details related to allotments made or options granted post 17th January, 2013 and up to 31st December, 2013 within 7 days from the end of the quarter.
4   Impact of the SEBI Circular- Our Viewpoint
With the intent to bring transparency in the operations of the Trusts formulated for extending Welfare Benefits to the Employees, SEBI vide its Circular dated 17th January, 2013 restricted the Employee Welfare Trusts to buy shares from the secondary market and to dilute their existing holding by 30th June, 2013. In this regard, upon receipt of various representations seeking clarification on the applicability of the Circular and for extension of time period for dilution of shareholding by the Trusts, SEBI has further come out with the subsequent amendment in order to address various ambiguities for dilution of shareholding by the Trusts and its impact on the Capital Market. With this initiative of SEBI, it can be said that the SEBI has addressed almost all the commercial difficulties to create hassle free corridor for the Listed Entities on one hand and protected interest of public at large on the other. However, certain issues related to the holdings of the Employee Welfare Trusts that are not been backed by any operational ESOP/ESPS Schemes, still need to be addressed.
From all the above, it can be concluded that like two sides of a coin, SEBI´s Circulars are surely considered as a welcome step for putting an end to the unfair practices being followed by some listed entities under the garb of doing welfare activities for their employees whereas on the other hand, it is like a castigation for those Companies who are using the Trust Route with bona fide intent to reward Employees and are continuously working towards creating real wealth for their real jewels i.e. Employees.

  The entire contents of this document have been developed on the basis of relevant statutory provisions and the information available at the time of the preparation. Though the author has made utmost efforts to provide authentic information however, assumes no responsibility for any errors which despite all precautions, may be found herein. The material contained in this document does not constitute/substitute professional advice that may be required before acting on any matter. The author and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.
Phantom Stocks
unique blend of Employee appreciation, with no Equity dilution
For any Organization-be it a Start up or a long existing one, the buzz word these days is Employee Retention. High employee turnover keeps the CEOs/ HR Heads on their toes and they keep wondering how to Award, Reward and Retain their human asset.

In such a scenario, Employee Stock Option Plan (ESOP) have emerged as a handy tool for employee retention. ESOP give the employee a right to buy a specific number of company's shares at a fixed price within a certain period of time.

ESOP inculcates a feeling of being the “Owner” and the Employees tend to perform better, thus leading to the Organisation’s betterment as well as the Employee enrichment. ESOP, thus, align the Promoters’ wishlist with the employee interest. ESOPs can even be granted to the employees of the Company’s holding/ subsidiary companies as well.

ESOP can be of varied types and forms - Employee Stock Purchase Scheme (ESPS), Restricted Stocks Units (RSUs), Performance Shares, Stock Appreciation Rights (SAR) including Phantom Stocks etc.
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