Securities and Exchange Board of India on June 16, 2015, issued guidelines to supplement its SEBI (Share Based Employee Benefits) Regulations, 2014, which was notified on October 28, 2014.
SEBI (SHARE BASED EMPLOYEE BENEFITS) REGULATIONS, 2014- AN OVERVIEW
The Regulator, on October 28, 2014, in accordance with the powers conferred to it, regulated the framework for all schemes formulated by the companies for the benefit of their employees involving dealing in shares, directly or indirectly, with a view to facilitate smooth operation of such schemes. The highlights of the Regulations were:
- It repealed the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 which were in force till then.
- The companies could now use secondary shares for issuing ESOSs. This would result in no dilution of existing share capital. Companies using secondary shares in their scheme, has to mandatorily set up an irrevocable Trust(s).
- The provisions of these regulations
applies to any company whose shares are listed on recognized stock
exchange and has 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 of the following conditions:
- The scheme is set up 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;
- These regulations shall not apply to shares issued under preferential allotment.
- The provisions applies to the
- Employee stock option schemes (ESOSs);
- Employee stock purchase scheme (ESPSs);
- Stock appreciation rights scheme (SARs); and
- Retirement benefit schemes (RBSs).
- Accounting for all the Equity based benefit plans has to be in accordance with Standards issued by ICAI.
REQUIREMENTS UNDER REGULATIONS AS PER THE CIRCULAR OF SEBI
The mechanism has prescribed certain compliances to instill enough safeguard to prevent any sham in the secondary market. The circular CIR/CFD/POLICY CELL/2/2015 issued by SEBI on June 16, 2015, is a guideline for the companies to do such compliances properly in accordance with the provisions. Thus, the Requirements specified by the circular are as follows:
MINIMUM PROVISIONS IN A TRUST DEED
The schemes involving secondary acquisition or gift or both, has to be implemented mandatorily through a trust. Other schemes may also be implemented through a trust. The SEBI requires certain provisions to be incorporated in the Trust Deed:
- Details of the Trust- its name, object, source of funds, its usage and details of scheme, settler, trustees;
- Powers and Duties of trustee(s);
- Provisions on dissolution of the Trust;
- Provisions specifying that the trustee shall not act in any manner that would be detrimental to the interests of the beneficiaries;
- Other clauses to safeguard the interests of the beneficiaries
A company shall constitute a compensation committee, as per section 178 of Companies Act, 2013, for administration and superintendence of the schemes. As per the regulation, the committee is required to formulate detailed terms and conditions of the schemes. SEBI has provided an inclusive list of such provisions:
- Quantum of the benefit;
- Kind of benefits;
- Conditions to avail the benefits;
- Period within which the employee shall exercise the option;
- Exercise period of the potion in the event of termination or resignation of an employee;
- Right of an employee to exercise all options at one time or at various points of time;
- The procedure for making a fair and reasonable adjustment to the entitlement of options/ SARs in case of corporate actions such as rights issues, bonus issues, merger, sale of division, etc.
- Rules for employees who are on long leave;
- Eligibility to avail benefits;
- The procedure for cashless exercise of options/ SARs.
As per the provisions of regulations, no scheme shall be offered to the employees of a company unless the shareholders of the company approve it by passing a special resolution. The explanatory statement to the notice shall include the information as specified by SEBI in this regard.
In case new issue of shares is made under the scheme, it has to be listed immediately on the stock exchange. A statement has to be filed by the company and obtain an in-principle approval from the stock exchange. Such statement shall include the description of the schemes in detail. The mandatory contents have been specified in the circular.
The company shall also notify the concerned stock exchange as and when an exercise of option/SAR is made. The format for such notification has been provided by the SEBI.
DISCLOSURES BY BOARD OF DIRECTORS
The Board of Directors in their report shall disclose any material change in the scheme(s) and whether the scheme(s) is/are in compliance with the regulations. SEBI has prescribed the following details that shall be disclosed on the company's website and a web-link thereto shall be provided in the report of board of directors:
- Relevant disclosures relating to the accounting standards;
- Diluted EPS on issue of shares pursuant to all the schemes;
- Details related to ESOS;
- Details related to ESPS;
- Details related to SAR;
- Details related to General Employee Benefit Scheme/Retirement Benefit Scheme (GEBS/ RBS);
- Details related to Trust;
No ESOS/SAR shall be offered unless the disclosures, as specified by the SEBI in this regard, are made by the company to the prospective option/SAR grantees. The disclosure documents specified by the SEBI in the circular are:
- Statement of Risks;
- Information about the company;
- Salient features of the scheme;
The disclosures/certain processes, which had not been mentioned in the regulations, have now been provided by the SEBI in its circular. This will help the listed companies in its due compliances. By providing these requirements, SEBI has ensured that the companies do not take undue advantage in the secondary market, which can now be entered as per the new regulations.
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