History for Introduction of SEBI (Share Based Employee Benefits) Regulations, 2014

SEBI has notified new regulations for share based employee benefits on 28^th October, 2014, applicable from the date of its notification. These regulations have replaced the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

SEBI had earlier amended the ESOP guidelines through Circular No.CIR/CFD /DIL/3/2013, dated 17 January 2013, to prohibit companies from buying/selling its own securities in the secondary market.  SEBI  had  given  the  listed  companies  having  such ESOP  schemes  the timeline till 30^th June 2013 for alignment of their scheme with  the amended  guidelines. Thereafter the timeline was further extended to 31 December 2013 through Circular No. CIR/CFD/DIL/7/2013, dated 13 May 2013. Subsequently, in Press Release 63/ 2014 dated 19^th June, 2014, SEBI had approved the proposals to review the existing regulatory framework on ESOP guidelines to address issues regarding composition of Trusts, facilitate secondary market acquisitions, enhanced disclosures and better enforceability, which have now been notified as New Regulations.

Schemes Covered

These Regulations cover the following Schemes

• Employee Stock Option Scheme or ESOS means a scheme under which a company grants employee stock option directly or through a trust;
  • Minimum vesting period of 1 year
  • Company may specify lock-in period
• Employee Stock Purchase Scheme or ESPS means a scheme under which a company offers shares to employees, as part of public issue or otherwise, or through a trust where the trust may undertake secondary acquisition for the purposes of the scheme
  • Minimum Lock-in period for shares is 1 year from the date of allotment
• Stock Appreciation Right or SAR means a right given to a SAR grantee entitling him to receive appreciation for a specified number of shares of the company where the settlement of such appreciation may be made by way of cash payment or shares of the company
  • Minimum vesting period of 1 year
  • The employee shall not have the right to receive dividend or vote in respect of the SAR granted to him
• General Employee Benefits Scheme or GEBS means any scheme of a company framed in accordance with the SEBI (Share Based Employee Benefits) Regulations, 2014, dealing in shares of the company or the shares of its listed holding company, for the purpose of employee welfare including healthcare benefits, hospital care or benefits, or benefits in the event of sickness, accident, disability, death or scholarship funds, or such other benefit as specified by such company
  • the shares of the company or shares of its listed holding company <= 10% of the book value or market value or fair value of the total assets of the scheme, whichever is lower
• Retirement Benefit  Scheme  or  RBS means  a  scheme  of  a  company,  framed  in accordance with SEBI (Share Based Employee Benefits) Regulations, 2014, dealing in shares of the company or the shares of its listed holding company, for providing retirement benefits to the employees subject to compliance with existing rules and regulations as applicable under laws relevant to retirement benefits in India
  • the shares of the company or shares of its listed holding company <= 10% of the book value or market value or fair value of the total assets of the scheme, whichever is lower

Companies to which these Regulations shall apply

These Regulations shall apply to all the companies listed on a Recognized Stock Exchange and who have a scheme

• for direct or indirect benefit of employees; and
• involving dealing in or subscribing to or purchasing securities of the company, directly or indirectly; and
• satisfying, directly or indirectly, any one of the following conditions:
  • the scheme is set up by the company or any other company in its group;
  • the scheme is funded or guaranteed by the company or any other company in its group;
  • the scheme is controlled or managed by the company or any other company in its group

Implementation of the Scheme

• A company may implement schemes either directly or by setting up an irrevocable trust(s).
• If the scheme is to be implemented through a trust the same has to be decided upfront at the time of taking approval of the shareholders for setting up the schemes
• if the scheme involves secondary acquisition or gift or both, then it is mandatory for the company to implement such scheme(s) through a trust(s)
• A company may implement several schemes as permitted under these regulations through a single trust
• SEBI may specify the minimum provisions to be included in the trust deed under which the trust is formed, and such trust deed and any modifications thereto shall be mandatorily filed with the stock exchange in India where the shares of the company are listed.
• Trustees:
  • A person shall not be appointed as a trustee, if he-
    • is a director,  key managerial  personnel  or promoter of the company or its  holding, subsidiary  or  associate  company  or  any  relative  of  such  director,  key  managerial personnel or promoter; or
    • Beneficially holds ten per cent or more of the paid-up share capital of the company.
  • of trustees
    • where individuals or one person companies are appointed as trustees, minimum no. of trustees=2,
    • where a corporate entity is appointed as a trustee, then it may be the sole trustee
  • The trustees of such a trust shall not vote in respect of the shares held by such trust.
• The trust shall not deal in derivatives, and shall undertake only delivery based transactions for the purposes of secondary acquisition as permitted by these regulations
• For the purposes of disclosures to the stock exchange, the shareholding of the trust shall be shown as non-promoter and non-public‘ shareholding
• Secondary acquisition in a financial year by the trust <= 2% of the paid up equity capital as at the end of the previous financial year
• Limit for Secondary Acquisition:
  • The total number of shares under secondary acquisition held by the trust shall be within below mentioned limits as a percentage of the paid up equity capital as at the end of the financial year immediately prior to the year in which the shareholder approval is obtained for such secondary acquisition
  • For ESOS, ESPS, SARS <= 5%
  • For GEBS, RBS <= 2%
  • For all the Schemes in aggregate <=5%
• Holding Period of securities acquired through Secondary Acquisition: The holding period the shares acquired through secondary acquisition shall be a minimum of of six months except where they are required to be transferred under the following circumstances :
  • transfer to the employees pursuant to scheme(s)
  • when participating in open offer, buy-back, delisting or any other exit offered by the company generally to its shareholders
• Sale of shares held by the trust: In order to make sure that the trust does not become a mechanism for trading in shares, it shall not sell the shares in secondary market except under the following circumstances:
  • cashless exercise of options under the ESOS;
  • on vesting or exercise, as the case may be, of SAR under the SARS;
  • in case of the need of funds by the trust to meet the commitment arising out of the objective of the schemes – GEBS and SARS, and for this purpose –
    • the trustee shall record the reasons for such sale; and
    • money so realised on sale of shares shall be utilised within a definite time period as stipulated under the scheme or trust deed.
  • participation in buy-back or open offers or delisting offers or any other exit offered by the company generally to its shareholders, if required;
  • for repaying the loan, if the un-appropriated inventory of shares held by the trust is not appropriated within the timeline;
  • winding up of the scheme(s); and
  • based on approval granted by SEBI to an applicant, for the reasons recorded in writing in respect of the ESOS, ESPS, SARS, upon payment of a non-refundable fee of rupees one lakh along with the application by way of a banker‘s cheque or demand draft payable at Mumbai in favour of the Board.

Employee Eligibility

An employee shall be eligible to participate in the schemes of the company as determined by the compensation committee. An employee as been defined under these Regulations to mean,

• a permanent employee of the company who has been working in India or outside India; or
• a director of the company, whether a whole time director or not but excluding an independent director; or
• an employee as defined above, of a subsidiary, in India or outside India, or of a holding company of the company or of an associate company but does not include—
  • an employee who is a promoter or a person belonging to the promoter group;
  • a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the company

Compensation Committee

• A company shall constitute a compensation committee for administration and superintendence of the schemes.
• Where the scheme is being implemented through a trust the compensation committee shall delegate the administration of such scheme(s) to the trust.
• The compensation committee shall consist of 3 or more non-executive directors, out of which not less than half shall be independent directors.
• The committee shall frame suitable policies and procedures to ensure that there is no violation of securities laws, including those related to Insider Trading, Fraudulent and Unfair Trade Practices by the trust, the company and its employees, as applicable.

Shareholders’ approval

• No scheme shall be offered to employees of a company unless the shareholders of the company approve it by passing a special resolution in the general meeting
• Approval of shareholders by way of separate resolution in the general meeting shall be obtained by the company in case of:
  • Secondary acquisition. Such approval shall mention the % of secondary acquisition that could be undertaken;
  • Secondary acquisition by the trust in case the share capital expands due to capital expansion undertaken by the company to maintain the 5% cap of such  increased  capital  of  the company;
  • Grant of option, SAR, shares or other  benefits to employees of subsidiary or holding or associate company;
  • Grant of option,  SAR,  shares  or  benefits  to  identified employees during any one year >= 1% of the issued capital of the company.

Variation of the terms of Scheme

The company may, by special resolution in a general meeting, vary the terms of the schemes offered but not yet exercised by the employee, only if such variation is not prejudicial to the interests of the employees except to meet any regulatory requirements.

Winding up of the Scheme

In case of winding up of the schemes being implemented by a company through trust, the excess monies or shares remaining with the trust after meeting all the obligations, shall be utilised for repayment of loan or by way of distribution to employees as recommended by the compensation committee.

Non-Transferability

• Option, SAR or any other benefit granted to an employee under the regulations shall not be transferable to any person.
• The option, SAR, or any other benefit granted to the employee shall not be pledged, hypothecated, mortgaged or otherwise alienated in any other manner.
• In the event of death of the employee while in employment, all the options, SAR or any other benefit granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.
• In case the employee suffers a permanent incapacity while in employment, all the options, SAR or any other benefit granted to him as on the date of permanent incapacitation, shall vest in him on that day.
• In the event of resignation or termination of the employee, all the options, SAR, or any other benefit which are granted and yet not vested as on that day shall expire
• In the event that an employee who has been granted benefits is transferred or deputed to an associate company prior to vesting or exercise, the vesting and exercise as per the terms of grant shall continue even after the transfer or deputation.

Compliances and Conditions

• For listing of shares issued pursuant to ESOS, ESPS or SAR, the company shall obtain the in-principle approval of the stock exchanges where it proposes to list the said shares.
• When holding company issues  option,  share,  SAR  or  benefits  to  the  employee of its subsidiary, the cost incurred by the holding company for issuing such option, share, SAR or benefits shall be disclosed in the ‘notes to accounts’ of the financial statements of the subsidiary company.
• If the subsidiary reimburses the cost incurred by the holding company in granting option, share, SAR or benefits to the employees of the subsidiary, both the subsidiary as well as the holding company shall disclose the payment or receipt, as the case may be, in the ‘notes to accounts‘ to their financial statements.
• The company  shall  appoint  a  registered  merchant  banker  for  the  implementation  of schemes covered by these regulations till the stage of obtaining in-principle approval from the stock exchanges
• To ensure a smooth transition for complying with the new regulatory framework, the existing employee benefit schemes have  been  provided with a time period of one year from the date of notification.
• Further, a  longer  transition  period  of five  years from the date of notification has been provided for the following:
  • Re-classifying shareholding     of     existing employee benefit schemes separately from ‘promoter’ and ‘public’ category.
  • Bringing down the trust’s holding in shares within the permissible limits.
  • For GEBS or RBS, reducing trust’s share component to 10 per cent of the total assets of the trust.