Review of Stock-Related Employee Benefit Schemes

legal regime pertaining to the grant of employee stock options (ESOPs) and
employee share purchases (ESPSs) has been undergoing some change in recent years,
particularly for those that are implemented through a trust established by a
company for this purpose. In August 2012, SEBI announced its decision requiring
all listed companies to frame employee benefit schemes only in accordance with
the SEBI (ESOP and ESPS) Guidelines, 1999 and set out a specified timeframe for
compliance. Moreover, such schemes would be confined only to the primary
markets and they will be restrained from acquiring shares from the secondary
markets for the purpose of grant of ESOPs or ESPSs. The rationale for this
approach was discussed in an earlier
SEBI had
that the new regime would have to be given effect to by June 30, 2013, which
was extended
to December 31, 2013 due to representations received by SEBI. It appears that
SEBI has received further feedback regarding the stringency of this restrictive
regime, and has sought to reconsider some of its approaches. Towards that end,
it yesterday put out a discussion
on “Review of guidelines governing stock related employee benefit
schemes”. It has raised a series of questions on which feedback is sought by
December 5, 2013.
discussion paper focuses on two key aspects. First, it seeks to reintroduce the ability of employee trusts to
acquire shares in the secondary markets in order to grant ESOPs and ESPSs to
employees. Second, it also seeks to
regulate other kinds of employee benefit schemes that relate to shares of a
company. In doing so, the proposal seems to be to overhaul the existing SEBI
(ESOP and ESPS) Guidelines, 1999 and also to convert them into regulations.
discussion paper contains a summary of the efforts:
7. It was felt that secondary market
acquisitions by Trusts being an internationally accepted practice should be
considered subject to necessary safeguards to prevent misuse. It was also noted
that secondary market acquisitions allow companies to grant options to
employees without having to dilute their existing share capital. Further, it
was also recognized that there are many kinds of employee benefit schemes
involving own securities which being outside the purview of extant ESOS
Guidelines are unregulated. There is also a need to provide for a suitable
regulatory framework for such kind of schemes.
discussion paper contains a set of detailed questions on which feedback has
been sought. The questions seem to have been prepared after due thought and
consideration, and are a useful method of obtaining feedback from the various

Of course, ESOPs, ESPSs and other stock-based remuneration have lost
their spark in recent years (compared to about a decade ago), but SEBI’s effort
seems to be to at least create a conducive legal framework for the utilization of
the method to the extent the market commands their usage.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • It is also interesting that the SEBI has proposed the shares held by the ESOP/ESPS Trusts will be considered a part of the promoter shareholding for the purpose Clause 40A of the Listing Agreement/ Section 19 and 19A of the SCRR (minimum 25% public float to be maintained). This was not clearly spelled out under the existing guidelines. This should go a long way in rectifying the abuse of the ESOP/ESPS Trusts as holding vehicles for promoters, which was one of the reasons the ESOP/ESPS Trusts were barred from making secondary market acquisitions.

  • Tentative Reaction > R Gupta (RG) is observed to have drawn attention to a vital aspect, -not found a mention in the Post. At the first blush, it is felt, that might make for a world of difference; more particularly, for tax purposes.
    To one's understanding, under the extant scheme of things, on exercise of the given option by employee, shares are freshly issued/allotted by the employer; hence, at that point in time no 'transfer', so much so entails no tax incidence. -How far such shares would fall strictly / could correctly be regarded as covered, within the normally understood concept of 'primary market' as spoken of, is, of course, a separate and independent point to ponder.
    Be that as it may, if allotment to employee were to be of shares 'purchased n secondary market' , then that could attract fresh tax implications on the ground of involving a 'transfer'.
    In any case, on the premise of the position drawn attention to by RG, one is not at all clear why then or what really is the intended purpose, so as to be of any advantage, either from the point of view of employer , or even of employee. Except that it may become necessary to suitably rewrite -modify or amend – the present provisions in IT Act, if status quo were to be maintained.
    < Open to correction by any eminent tax expert, should the forgoing line of thinking is found to be faulty.

  • If the trustees of the trust are independent and the beneficiaries of the trust are employees [and not the promoters], there is no good reason to consider the shares held by such a trust to be disclosed as part of promoter holding.

    The rationale in clause 11 of the discussion paper is in contradiction to the rationale in clause 10, which states that, "It is important to ensure and demonstrate independency in
    the administration and
    governance of the Trust. Independent Trustee is one
    mechanism of ensuring the

    Be that as it may, the said proposal may also require an amendment to Rule 2(e) of the SCRR, which defines the term "public shareholding". It will also require an amendment to the format of shareholding pattern under clause 35 of the shareholding pattern and will also require amendment to the SEBI (SAST) Regulations, 2011, to determine the public shareholding and promoter shareholding by including or excluding the shares held by such a trust [the denominator] for the purpose of arriving at the offer size etc.

    Kind regards,
    Yogesh Chande

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