SEBI introduces new Regulations for governance & implementation of Employee Benefit Scheme

With the intent to keep a tab on certain ongoing malpractices under the garb of ESOPs and the Trusts to implement them, SEBI has mandated to bring all share based employee benefit schemes under the Regulatory ambit and has thus has notified new Regulations on October 28, 2014, thereby repealing the existing SEBI (ESOS & ESPS) Guidelines, 1999.Taking into account the wider perspective of Employee Benefit Schemes in India as well as overseas and with the intent to align the provisions of the extant regulations with the Companies Act, 2013, the Market Regulator, SEBI has floated new Regulatory framework governing the regime of Employee Welfare Programmes. These new Regulations have been named SEBI (Share Based Employee Benefit Schemes) Regulations, 2014.This move of SEBI is a welcoming step that aims at streamlining the regulatory framework with the dynamic business environment thereby ensuring transparency in the operations of the Employee Welfare Trusts on one hand and bringing all Welfare Schemes involving Shares of the Listed Entities under the regulatory arena.SEBI, through the new Regulations, has brought an end to the ongoing dilemma as to allowance / disallowance of secondary market purchases for ESOPs. SEBI has allowed secondary market acquisitions by the Employee Welfare Trusts subject to compliance of certain conditions.Main highlights of the new Regulations are outlined as follows:

  • Guidelines have now been changed to Regulations, thus giving them a stricter enforceability;
  • The Regulations have broadened horizons for rewarding Employees without resulting in dilution of existing capital base of the Listed entities by allowing Trust Route.
  • The arena of applicability of the regulations has been widened, now all Employee Benefit Schemes involving Shares of the Company, including General Employee Benefit Schemes (GEBS) and Retirement Benefit Schemes (RBS)alongwith ESOS & ESPS, will be governed by the  Regulations now;
  • For the first time, Stock Appreciation Rights (SARs), a worldwide remuneration mode, have been recognized under the Indian laws and have been brought under the ambit of SEBI Regulations;
  • The provisions of these regulations shall also apply to any Scheme set up, funded or controlled by a listed company, on any Stock Exchange in India or any of its group company;
  • The new Regulations also cover the employees of Associate Company;
  • Certain new definitions like ‘appreciation’, ‘market price’, ‘group company’, ‘relevant date’, ‘GEBS’, ‘RBS’, ‘SARs’, ‘Secondary Acquisition’, ‘Trust’ have been introduced;
  • If the scheme is to be implemented through  Trust Route, then the Company has to decide the same upfront at the time of taking shareholders approval;
  • Trust deed and any modifications thereto are needed to be filed with the Stock Exchanges;
  • Several Schemes can be implemented through a single Trust;
  • Trustees shall not have the power to vote/ any right to receive dividend on the shares held by the Trust;
  • Secondary Acquisitions by the Employee Welfare Trusts have been allowed subject to special resolution passed by the Shareholders. However, Trust cannot sell these shares again in the secondary market except in certain circumstances such as cashless exercise, vesting/exercise of SARs or certain emergency situations, subject to conditions;
  • Secondary Acquisition in a Financial Year by the Trusts shall not exceed 2% of the paid-up capital of the Company. Additional thresholds have been prescribed for maximum limit on secondary acquisitions at any point of time. The Trust shall undertake only delivery based transactions;
  • A minimum holding period of 6 months has been prescribed for the shares bought from the market, except when the shares have to be tendered under an Open Offer/ a Buyback offer/ a Delisting offer;
  • The shareholding of the Trust to be shown as ‘Non-promoter and non-public shareholding’ for all disclosure purposes, which shall however, not be counted towards compliance with Cl 40 A of the Listing Agreement;
  • Trusts shall make disclosures & comply with  SEBI (Prohibition of Insider Trading) Regulations, 1992;
  • The Nominee Director of an Institution can be given the grants subject to certain conditions. A copy of the Agreement/ contract is needed to be filed with the Stock Exchanges;
  • Repricing of the unexercised part is allowed with the approval of shareholders;
  • New sections on SARs, GEBS & RBS have been introduced;
  • As in case of ESOS, there shall be a minimum vesting period of one year in SARs scheme as well. SARs can be settled both by way of equity as well as cash;
  • Under GEBS and RBS, the shares of the company or its listed holding company shall not exceed 10% of the book value or market value or fair value of total assets of the scheme, whichever is lower;
  • SEBI has been empowered to relax strict compliance of regulations either suo moto or on an application made by the Company;
  • Notwithstanding the repeal of old Guidelines:-
    1. prohibition on acquiring securities from the secondary market as provided in SEBI circular CIR/CFD/POLICYCELL/3/2014 dated June 27, 2014 shall continue till the existing schemes are aligned with these regulations;
    2.  all listed companies having existing schemes to which these regulations apply are required to comply with these regulations in their entirety within one year of the same coming into effect, subject to the following exceptions:
      1. trusts holding shares, for the purposes of implementing employee benefits schemes of the company, beyond the permissible limits as provided under these regulations, shall have a period of five years to bring down its holding in shares to such limits;
      2. trusts holding shares, for the purposes of implementing GEBS or RBS, which exceed ten per cent. of the total value of the total assets of the trust(s) as provided under these regulations, shall have a period of five years to bring down its holding in shares to such limits;
      3.  for the purposes of the requirement of maintaining adequate public shareholding, those trusts holding shares of the company which are shown either as ‗promoter‘ or ‗public‘ shareholding, shall be permitted to continue to be shown them as such for a further period of only five years;


The new Regulations would surely bring an end to the manipulative activities being undertaken in some of the listed companies, under the cover of ESOP Trusts and using it as their portfolio managers for shares buy sale transactions. However, there still remain certain areas of doubts, some of them are given below:

  • Are the Regulations applicable not just to the listed companys’ schemes, but also to the Schemes framed by any of its group companies-whether be listed or unlisted?
  • A single individual can’t be the sole Trustee of the Trust?
  • Even for the purpose of transfer of shares to employees, pursuant to Scheme, whether the minimum holding period of 6 months is mandatory for the Trust?
  • For the purpose of Repricing, prior shareholders’ approval has been mandated for. But, the Price for Grants in itself is not approved by the Shareholders, so, how to have the repricing approved by them. Furthermore, this will lead to a delay in the entire process. In our opinion, this power should be delegated to the Compensation Committee itself.
  • In many a Clauses, it has been mentioned “as may be specified by SEBI”. But the formats/ Schedules are yet to be issued;


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