Sebi notifies new ESOP regulations

Market regulator Sebi has notified new ESOP regulations, including for purchase of shares by employee welfare trusts from the secondary market with adequate safeguards.

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 (ESOP) are 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.

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

Some of the safeguards as outlined by the 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% of the assets held by general employee benefit schemes other than ESOP 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% of the total assets of general employee benefit schemes.

In a notification, Sebi said, "the trust shall be required to hold the shares acquired through secondary acquisition for a minimum period of six months."

"Secondary acquisition in a financial year by the trust shall not exceed 2% of the paid up equity capital as at the end of the previous financial year," it added.

The regulator said option, SAR (stock appreciation right) or any other benefit granted to an employee under the regulations should not be transferable to any person.

Sebi said a company would have to constitute a compensation committee for administration and superintendence of the schemes.