Promulgation of SEBI (Share Based

Employee Benefit) Regulations, 2014

Background….

In 2013: The Market Regulator, SEBI, noticed that some Listed Entities

were framing their own Employee Benefit Schemes wherein Trusts have

been set up to deal in their own securities in secondary market with the

object of manipulating the price of the securities by engaging in fraudulent

& unfair trade practices.

17th January, 2013: SEBI restrained Employee Welfare Trusts from

Secondary Market Acquisitions.

13th May, 2013: SEBI allowed Trusts to hold securities acquired prior to

17th January, 2013, provided that such securities are used only in

accordance with such aligned schemes.

29th November, 2013: SEBI extended the deadline for re-alignment of the

Scheme from 31st December, 2013 to 30th June, 2014.

Discussion Paper & Press Release…

SEBI issued a discussion paper in December, 2013, for public

comments with the primary objective of framing a

comprehensive set of regulations not only governing the

working of employee welfare trusts dealing in secondary market

acquisitions but also bringing all types of Employee Welfare

Trusts under the ambit of said regulations.

SEBI, in its meeting held on 19th June, 2014, approved the

proposal to review SEBI (ESOS & ESPS) Guidelines, 1999 and

to frame a new set of Regulations.

New Regulations…Bringing the ongoing dilemma to an end…

• The Market Regulator, SEBI has now floated new

Regulatory framework governing the regime of Employee

Welfare Programmes wherein the company securities are

involved. These new Regulations have been named SEBI

(Share Based Employee Benefit Schemes) Regulations,

2014, notified on 28th October, 2014.

• This move of SEBI is a welcoming step that aims at

streamlining the regulatory framework with the dynamic

business environment thereby ensuring transparency in

the operations of the Employee Welfare Trusts on one

hand and bringing all Welfare Schemes involving Shares

of the Listed Entities under the regulatory arena.

SEBI (Share Based Employee

Benefit) Regulations, 2014

Applicability of SEBI (SBEB) Regulations,

2014…

Equity based schemes Non-equity schemes

Employee Stock Option

Scheme

Employee Stock

Purchase Scheme

Stock Appreciation

Rights

Stock Appreciation

Rights

GEBS

RBS

Any scheme set up/funded/controlled by the

Company or any company in its group.

Appreciation ‘ Difference between market price on the date of exercise of SAR

and the SAR Price.’

Associate Company- As defined under Companies Act, 2013.

Employee- Now also includes the employees of associate company.

Key Managerial Personnel- As defined under Companies Act, 2013.

Market price- Latest available closing price on Recognised Stock Exchange.

General Employee Benefit Schemes (GEBS)

Few New Definitions Introduced

Retirement Benefit Schemes (RBS)

Relevant Date- In case of grant and exercise.

Secondary Acquisition- Acquisition of existing shares of company from

recognised stock exchange.

Stock Appreciation Right Or SAR- Giving cash incentive in the form of

appreciation to employees

Trust- Trust established under Indian Trusts Act, 1882.

Trustee- Trustee of the Trust.

Continued……..

ESOS/ESPS

SCHEMES

Trust

RouteDirect

Route

No major change

introduced.

New provisions have been

incorporated.

Employee Stock Plans

GEBS

RBS

SARs

Employee Welfare Trusts- Elaborative

Approach…

The new ESOP Regulations aim at streamlining the

regulatory framework with regard to Employee Welfare

Trusts under ESOP/ESPS Schemes, which is outlined

below:

• Trust route:- To be decided upfront at the time of taking

shareholder approval for the scheme;

• Trust route mandatory:- If the Scheme involves

secondary market acquisition or gift or both;

• Several Schemes can be implemented through a single

Trust;

• Trustees shall not have the power to vote/ receive

dividend on the shares held by the Trust;

• Secondary market acquisitions by Employee Welfare

Trusts:- Allowed subject to special resolution.

Threshold of acquisition:- 2% of paid-up capital in a financial year;

Trusts cannot sell these shares again in the secondary market except in certain

circumstances such as cashless exercise, vesting/exercise of SARs or certain

circumstances emergency situations, subject to conditions;

A minimum holding period of 6 months for the shares bought from the market;

Trust shall comply with SEBI (Prohibition of Insider Trading) Regulations, 1992.

Trust to maintain proper books of accounts, records and documents;

No dealings in derivatives by Trusts;

Trust cannot be a revocable Trust;

Un-appropriated inventory to be appropriated upto end of subsequent Financial

Year;

Trust to be shown as Non-public-non-promoter category in the Shareholding

Pattern;

Continued……..

• Director;

• Promoter;

• Key managerial personnel;

• Relative of above mentioned persons;

OR

• Person who beneficially holds 10% or more of paid-up shares capital of the

company;

Who cannot be a Trustee?

Appointment of Individual or ‘One Person Company’ as a Trustee -

Mininum 2 Trustees to be appointed

In case of corporate trustee – Single entity is allowed

Stock Appreciation Rights

SAR scheme to contain the details of manner in which the

scheme will be implemented;

SARs can be equity settled or cash settled;

Minimum vesting period of one year;

No voting right or right to receive dividend to Employee for the SARs

granted ;

Any scheme dealing in shares of Company/ Listed

Holding Company, shall be in accordance with these

Regulations.

Employee

WelfareHealth

Benefit

Accident

Benefit

Scholarship

Benefit

The shares of the Company or its listed holding company shall not

exceed 10% of the book value or market value or fair value of total

assets of the scheme, whichever is lower.

General Employee Benefit Schemes

Retirement benefits to Employees

The shares of the Company or its listed holding company shall not

exceed 10% of the book value or market value or fair value of total

assets of the scheme, whichever is lower.

Retirement Benefit Schemes

Any scheme dealing in shares of Company/ Listed

Holding Company, shall be in accordance with these

Regulations.

Trust deed and any modifications thereto;

Shareholding of Trust to be shown as ‘non-promoter & non-public’;

In case of grant to a director as nominee:- Copy of contract or agreement to be

filed;

Board of Directors to disclose details of the scheme(s);

New shares issued to be listed immediately;

Trust to make disclosures regarding SEBI (Prohibition of Insider Trading)

Regulations, 1992;

Details of the current Un-appropriated inventory, if it does not get appropriated

within one year from the date of these new Regulations;

Mandatory Disclosures & Filings with

STOCK EXCHANGES

The Board may suo moto or on an application made by a

company, grant relaxation from strict compliance of these

regulations;

A company making application for relaxation, along with the

requisite fee;

Exemption Powers to SEBI…

Prohibition on secondary market acquisition:- continue till the schemes are

aligned with these regulations;

All listed companies having existing schemes, which are not aligned, shall align

the same within 1 year;

Trusts holding shares beyond permissible limits:- 5 years to bring down its

holding;

Trusts holding shares for GEBS/RBS, exceeding 10%:- 5 years to bring down its

holding;

For the purposes of the requirement of maintaining adequate public shareholding,

those trusts holding shares of the company which are shown either as ‗promoter‘

or ‗public‘ shareholding, shall be permitted to continue to be shown them as such

for a further period of only 5 years;

Current Un-appropriated inventory held by the Trust, can be sold on RSE within 5

years from the end of the 1 year of the new Regulations;

Timeline to comply with New Regulations…

Conclusion…

Any company having any Employee Benefit Scheme, dealing in

Company’s/ its Listed Holding Company’s shares, will have to comply

with these Regulations;

Any company having an Employee Benefit Scheme, proposing to come

out with an IPO, shall prior to the IPO, comply with these Regulations;

Companies following the Direct Route Model, can continue to follow

the same, without much amendments in the schemes/ Modus Operandi;

All companies having any Employee Benefit Schemes, which is not in

compliance with these Regulations, shall align the same within one

year from the date of these Regulations;

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