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SEBI’s New Share Based Employee Benefits Regs!

Published on Wed, Nov 05,2014 | 17:16, Updated at Wed, Nov 05 at 17:16Source : 

By: Shalini Jain, Director - Tax & Regulatory Services, EY

In this very dynamic era, most of the organisations are faced with a persistent challenge of attracting and retaining talented employees. Equity based compensation or stock based incentive schemes are widely used by the organisations in India and across the globe for their perceived benefits to both employer and employees in the long run.

While such stock based incentive schemes serve multiple objectives, they do come with their own set of tax and regulatory challenges. Historically, regulatory requirements in India with respect to stock based incentive schemes were restricted largely to listed companies and that too to traditional Employee Stock Option Scheme (‘ESOS’) and Employee Stock Purchase Scheme (‘ESPS’)  by way of Securities & Exchange Board of India (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines, 1999 (‘SEBI Guidelines’).

The SEBI Guidelines were silent on the acquisition of shares of the company from the secondary market. As a result, some listed companies were framing their own employee stock based incentive schemes wherein trusts were set up to deal in their own shares through the secondary market acquisitions – this was not really envisaged in these SEBI Guidelines.

In order to address this concern, SEBI prohibited the listed companies from framing any employee stock based incentive scheme involving acquisition of own securities from the secondary market.  Such a prohibition was not in line with the internationally accepted practice and accordingly, there was a clear need to review the prohibition of secondary market acquisitions of shares by the trusts, subject to necessary safeguards.

In view of the above, SEBI recently notified the much awaited new set of regulations, SEBI (Share Based Employee Benefits) Regulations, 2014 on 28 October 2014 replacing the erstwhile guidelines. The regulations not only cover the traditional ESOP and ESPS but also cover Stock Appreciation Rights Schemes (SAR), General Employee Benefits Schemes (GEBS) and Retirement Benefit Schemes (RBS).  GEBS is a scheme dealing in shares of the company or its listed holding company for 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. RBS is scheme dealing in shares of the company or 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. In line with ESOS, a minimum one year vesting period has been prescribed for SAR.

The biggest sigh of relief for the listed companies is that these regulations permit the listed companies to set up a trust to administer the employee stock based incentive schemes and purchase shares of the company from the secondary market subject to adequate safeguards. Secondary market purchases avoid dilution of share capital of the company and do not impact the value of the existing shares.  This will help the listed companies who want to provide stock benefit to the employees yet do not want a dilution of their share capital. While providing this relief, SEBI has provided very strict compliance requirements to ensure that there is no misuse of the regulations - if the employee stock based incentive scheme is to be implemented through the trust, the same has to be decided upfront at the time of obtaining the approval of the shareholders for setting up the scheme, mandatory filing requirement of the trust deed with the stock exchange, restriction on who cannot be appointed the trustee etc. The secondary acquisition in a financial year by the trust shall not exceed 2% of the paid up equity capital of the company. There are restrictions also in terms of how much equity can the trust hold for various schemes. All these measures will ensure greater transparency in the functioning of the trust meeting the objective of both the listed companies and the SEBI as the market regulator.
SEBI has given a time period of one year for transition to comply with the new regulations considering the approvals required, changes in the internal policies, communication of changes to employees. Also, a larger transition period of five years has been given for re-classification of shareholding of existing employee benefit schemes separately from 'promoter' and 'public' category, bringing down the level of shares acquired from the secondary market within the permissible limit. The companies would be required to comply with the new regulations within the given timelines.

Listed companies which have such schemes dealing with shares are required to review the existing schemes and align the same with the new regulations within one year from the date of its applicability.  Additionally, listed companies who are proposing to implement such schemes should also ensure compliance with these regulations.

Unlisted companies proposing to go in for Initial Public Offering would also need to ensure compliance with these regulations in certain situations.

(Views expressed are personal)


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