Background SEBI has notified the SEBI
(Share Based Employee Benefits) Regulations 2014 (“the Regulations”) on
28th October 2014. They replace the SEBI (Employee Stock Option Scheme
and Employee Stock Purchase Scheme) Guidelines, 1999 (“the Guidelines”).
The Regulations come into force from that date. However, a transition
period has been given for certain specific matters as also generally to
bring all existing Schemes in conformity with the new Regulations.
The
new Regulations, though they have many amendments, are in many ways
similar in structure with the earlier Guidelines. However, the
Regulations now have far wider reach in three major aspects. Firstly,
they now specifically also cover share-based benefits such as Stock
Appreciation Rights. This is also made clear by the title of the
Regulations that now refers to generically sharebased employee benefits
other than stock options in place of Stock Options and Stock Purchase
schemes. Secondly, instead of providing specifically for how stock
options and share purchase schemes should be accounted for, the
Regulations essentially provide that the accounting shall be carried out
as per the Guidance Note/Accounting Standards of the Institute of
Chartered Accountants of India.
Thirdly, now, the Regulations
specifically provide for dealing in shares by schemes for employees
other than Schemes for stock options/share purchase. The earlier
Guidelines were more or less silent on this. As will be seen later, it
was found that many such schemes dealt in shares of the Company. The
concern was whether these were misused for various purposes. Now the
Regulations specifically recognise and permit, subject to conditions and
restrictions, purchase and otherwise dealing in shares of the Company.
Finally, the change in the legal status of the law from Guidelines to Regulations also has important implications.
These are discussed in detail hereafter.
Eligible employees
The
definition of employees has been modified. Employees of associate
companies (as defined in section 2(6) of the Companies Act, 2013) are
also eligible to such Schemes. Independent Directors are now
specifically ineligible. The conditions under which nominee directors of
institutions may be eligible have been made more elaborate.
Regulations specifically cover SARs
The
Guidelines did cover a form of Stock Appreciation Rights (SARs) but
this was indirect, and of a particular form only. They focused more on
stock option and share purchase schemes. Now, the Regulations provide
specifically for Schemes of SARs.
SARs provide for rights for
being paid for appreciation in the price of the shares. An employee
would thus be given a right to be paid for the increase in the value of
the shares from the date when the right was granted to the date when he
choses to exercise the SAR. The Regulations provide that he can choose
to be paid for the appreciation either in the form of cash or shares.
The
erstwhile Guidelines too did provide for cashless exercise of stock
options. This involved allotment of shares which would be handed over to
a stockbroker. The stock broker would then sell the shares. Of the sale
proceeds, the exercise price would be retained by the Company and the
appreciation paid to the employee.
The Regulations provide for
payment of appreciation directly by the Company without allotting any
shares. However, such appreciation can also be paid in the form of
shares.
The other features of SARs are similar to stock option/
share purchase schemes. There has to be a waiting period of one year
before exercise of the SARs.
General Employee Benefits Scheme (GEBS) and Retirement Benefit Schemes (RBS)
Two
new categories of Schemes have been now specifically covered. However,
such schemes are covered only if they deal or are intended to deal in
the shares of the company that they are required to comply with the
Regulations.
Such Schemes shall not hold more than 10% of their
assets as per the last audited balance sheet in the form of shares of
the Company. For this purpose, the book value or market value or fair
value of the assets is considered, whichever is the lowest.
To which Schemes are the Regulations applicable?
The
Guidelines applied to schemes set up by companies for issue of stock
options and share purchase. It was not clear whether other schemes that
also dealt in shares were also covered. It was seen that there were
Schemes that were for the benefit of the Company but were not apparently
controlled by the Company or its Promoters but also dealt in the shares
of the Company. Under what circumstances would such Schemes be
regulated? The Regulations now have specific provisions to deal with
this.
Firstly, they apply to Schemes of stock options, share
purchase, SARs, general employee benefits schemes and retirement benefit
schemes. Such Schemes should involve dealing in the shares of the
Company, directly or indirectly. Further, the Scheme should have a link
with the Company in any of the following ways:-
(i) the Scheme is set up by the Company or any other company in its group (the term group is widely defined); or
(ii) the Scheme is funded or guaranteed by the Company or any other company in its group; or
(iii) the Scheme is controlled or managed by the Company or any other company in its group.
The
Company of course needs to be a listed company. Thus, companies would
be free to set up Schemes for benefit of employees and the employees
themselves are free to set up such Schemes without being regulated by
SEBI. However, if they deal in the shares of the Company and are
connected with the company in any of the specified manner, then they
will need to comply with the provisions.
Dealing in shares by share based benefits Schemes
As
stated earlier, it was observed by SEBI that several Schemes were set
up apparently for the benefit of employees but dealt in the shares of
the company. They apparently were not connected with the company. They
held shares of the Company that were often acquired from the secondary
market. There were legitimate concerns that the object of such Schemes
was more to carry out illegitimate objects such as surreptitious holding
shares on behalf of the Promoters, carry out insider trading or price
manipulation, give market support to price at time of fall, etc. This
was of even more concern when funds of the Company were directly or
indirectly used.
SEBI did issue certain directions to require
control this aspect. However, it seems that it was also realised that
there may be legitimate reasons why certain Schemes may be required to
hold shares of the Company. The Regulations now provide for more
transparency and clarity. Such Schemes are now allowed to deal in shares
subject to certain restrictions and disclosures.Existing Schemes
holding shares are also required to comply after completion of a
transition period.
In case it is desired that share acquisition
be carried out through secondary acquisition or gift of shares, then
such Schemes should be administered through a Trust. There are certain
restrictions over appointment of Trustees to such Trusts. Further, in
such cases, specific and separate approval of the shareholders by way of
a special resolution is required to set up such Schemes.
SEBI lays down limits upto which the trusts administering such Schemes may hold shares. Stock options, share purchase and Sars may not hold shares more than 5% of the share capital of the Company in the year prior to which approval of the shareholders is obtained (as expanded by bonus/rights issues made later). For general benefits and retirement benefits Schemes, the maximum holding is 2%. however, all such Schemes put together cannot hold more than 5% shares. Such limits will not apply in case of gift of shares by the Promoters or other shareholders or where these are acquired by way of a fresh issue of shares.
The yearly cap on acquisition of shares through secondary market by the trust is set at 2% of the paid up share capital as at the end of the preceding financial year.
In any case, the number of shares acquired through secondary market purchases cannot exceed the grant of benefits in the form of stock options/share purchase/ Sars. If there are such excess holdings, they will need to be appropriated within a reasonable period but not beyond the end of the following financial year. There is also generally a lock in period of six months, except for certain specified manner of disposal.
The trustees of such trusts are prohibited from voting on such shares. This will ensure that such shares are not acquired for supplementing the voting power of the Promoters/management.
Further, the holding by such trusts will not be counted as part of public holding. Companies would thus be required to maintain the minimum public holding as required by law.
Approval of Shareholders Broadly, the requirement of approval of shareholders for such Schemes remain the same as under the Guidelines, i.e., approval should be by way of a special resolution. However, separate approval shall be obtained in certain cases such as permitting acquisition of shares from the secondary market, grant of options etc. to employees of subsidiary/holding/associate companies, etc.
Accounting for stock options, etc.
Accounting for discount on issue of stock options, etc. has always been a controversial issue. the Guidelines had provided in fair detail how such discount should be computed and accounted. Companies were required to follow such accounting as a pre-condition for issue of stock options, etc. at a price they chose to determine. However, it was seen that the accounting provisions were not very detailed particularly to cover the wide variety of such schemes in practice. Further, the accounting method created areas of potential difference between what was recommended by accounting bodies. The Regulations have now simplified the provisions. The accounting for such schemes shall be as per the Guidance note of ICAI or accounting Standards as may be prescribed by from time to time by the ICAI.
The Guidance note of the ICAI on accounting for employee Share Based payments covers such accounting requirements.
Transition Period
Companies that have existing Schemes are required to comply with the regulations within one year. Trusts holding shares in excess of the limits specified in the Regulations are required to bring down the holding in five years.
Regulations vs. Guidelines
The erstwhile Guidelines had, at best, dubious sanctity as an enforceable law. Several earlier important provisions relating to securities markets were in the form of Guidelines. It was uncertain to a large extent whether they could be enforced, whether acts/omissions in violation of law could make the transactions void and above all, whether SEBI could initiate adverse measures in the form of adverse directions, penalties and prosecutions against the parties.
As will be discussed later, it appeared that certain Schemes involved dealing in shares and it was felt that these dealing in shares were for purposes other than purely for benefit of employees. It may have been difficult to enforce the Guidelines or punish any violations in such cases.
Issue of the regulations cures these defects. Thus, this is an important change of the provisions relating to share-based benefits.
This trend of changing Guidelines into regulations is seen in other areas as well and it is expected soon for the provisions in regard to corporate governance.
Conclusion
The regulations, while not overhauling the provisions relating to share-based benefits substantially, do make important changes, remove certain possibilities for abuse align the provisions with the new Companies act, 2013.
