Sell ESOPs with caution

The new insider trading norms have made regulations governing stock options stricter. Any lapse can land you in trouble

Life could become difficult for those working in a listed company and are entitled to employee stock option plans (ESOPs). The stock market regulator, the Securities and Exchange Board of India, or Sebi, has come up with stringent insider trading norms that have put more restrictions on exercising and selling Employee Stock Options (ESOPs) on those who have information that can affect the stock price of the company.

The relief: Sebi has put the onus on the company and employees to define officials that are categorised under ‘connected persons’ that have ‘unpublished price sensitive information’. “Firms can declare an entire department, from junior to senior employees, as connected person, says Tapati Ghose, Partner at Deloitte Haskins & Sells. For example, those working in sales and marketing can face restrictions as they have information to company sales data or even those in finance and account as they know the financial position.

From granting to selling, ESOP is divided into two stages. When the company say that a person is eligible for stock option after a particular time, this is called as vesting period. This is minimum one year. On completion, when employee requests transfer of stocks to him or her, it’s called exercising of options.

According to the new laws, ‘connected employees’ cannot exercise or sell their ESOPs during the 45 days trading window, which kicks in when the company is about to declare its financial results; announcing dividends; public/rights/bonus issues; any major expansion plans or execution of new projects; amalgamation, mergers, takeovers and buy-back; and any changes in policies, plans or operations of the company. This means compulsorily connected employees cannot exercise of sell shares for at least 180 days in a year due to quarterly results. “While the trading laws existed earlier, the definition of people with insider information has broadened and covers larger number of employees,” says Ghose.

Kuldip Kumar, partner and leader (personal tax) at PwC India says that now employees cannot even exercise stock options during the trading window. Also, once the person has exercised ESOPs, they cannot sell it for a period of six months. None of these were earlier part of Sebi’s ESOP guidelines.

Baljit Singh Kalha, Partner at Titus & Co. Says that the regulations governing ESOPs have become challenging even for experts to implement. There are grey areas that further needs clarification failing which any person getting ESOP can be liable for insider trading. He suggests that employees must consult with company during the exercise and selling of stock options.

Ghose of Deloitte says that the only option for the employee is to come up with a ‘trading plan’ as outlined by the regulator in insider trading guidelines. When a person exercises ESOPs, they need to submit a document that outlines the number of shares they are going to sell, the value of those shares, and dates at which these shares will be sold. “Some employees will always have access to insider information. This document will protect them from any questions raised by the regulator, as the sale was predetermined at right when the person received the stocks,” says Ghose. However, once you submit the trading plan and it’s accepted by the compliance department, it is irrevocable. The employee cannot make any further changes to it.

Experts also said that if a company is planning for an initial public offer, it’s better they start sticking to the Sebi rules.