Sebi announces new set of ESOP regulations

Market regulator has allowed companies to have employee stock option programmes

Capital market watchdog Sebi today finalised an easier set of regulations for employee stock option schemes that among other things would classify ESOP Trusts as a separate category of shareholding entities.

With the new norms, the Securities and Exchange Board of India (Sebi) has allowed companies to have employee stock option programmes where they can buy their own company shares subject to certain conditions.

Employee stock options is a practice followed world over and the market regulator has outlined certain safeguards to improve the governance and transparency of the schemes and also address concerns regarding potential market abuse.

The decision was taken at a board meeting of Sebi here today.

"In order to help them (promoters) retain their control and at the same time help them reward the employees we have now come out with certain safeguards with regard to their use or misuse," Sebi Chief U K Sinha told reporters here.

Further, he noted that in India, some companies count it (shares held by ESOP Trusts) in the promoter category and some companies count it in the public category.

"We have now created another category that whatever shares are held in the ESOP Trust they will be neither counted as a promoter group or counted as a public it will be counted as a separate group and for meeting the requirements of our regulations we have given them five years time," Sinha said.

Some of the safeguards as outlined by the market regulator include, requirement of shareholders' approval through special resolution for undertaking secondary market acquisitions; restrictions on sale of shares by trusts; at least six month holding period for shares acquired from secondary market.

Among other safeguards include, stricter disclosure and other regulatory obligations; a limit of 10 per cent of the assets held by general employee benefit schemes other than ESOS type of schemes and certain limits on secondary market acquisitions.

To ensure a smooth transition for complying with the new regulatory framework, the existing employee benefit schemes have been provided with a time period of one year from the date of notification.

Further a longer transition period of five years has been provided for re-classifying shareholding of existing employee benefit schemes separately from 'promoter' and 'public' category.

Bringing down the level of shares acquired from secondary market within the permissible limits and reducing own share component to 10 per cent of the total assets of general employee benefit schemes.