Capital market regulator Sebi has barred employee welfare schemes and trusts of listed entities from purchasing their own shares from the secondary market, fearing stock manipulation.
Sebi will also ask listed companies to disclose all their existing employee benefit schemes involving stock purchases and align them in accordance with its ESOS and ESPS Guidelines within a given timeframe.
Sebi's ESOS (Employee Stock Option Scheme) and ESPS (Employee Stock Purchase Scheme) guidelines allow listed companies to reward their employees through stock option schemes and stock purchase schemes.
Sebi's crackdown against unregulated staff welfare schemes and trusts has comes amid concerns that some companies may be funding these schemes to deal in their own securities, with an aim to manipulate the share price by engaging into fraudulent and unfair trade practices.
The regulations prohibit the companies from buying their own shares, unless it is consequent to reduction of capital and for certain regulatory requirements.
The companies are also not allowed to give any loan, guarantee or other financial assistance for purchase of any shares in the company or in its holding company.
However, these restrictions do not apply, if the company provides funds to a Trust set up for the benefit of the employees and the Trust utilise such funds for purchase or subscription of shares in the company or its holding company.
Sebi has come across instances of companies putting in place certain employee benefit schemes, pursuant to which they are setting up Trusts either by themselves or through third party service providers to deal in shares of the company.
Some of the companies have also asked Sebi whether these schemes, which may involve purchase from secondary market by the Trust or by third parties for the benefit of employees, would fall under its ESOS and ESPS guidelines.
As per Sebi guidelines, ESOS/ESPS Trusts can only distribute options/shares to its employees issued by the company.
Even under ESPS, the shares have to be issued by the company through a public issue or related methods.
The guidelines are, however, silent on acquisition of shares from secondary market, although schemes involving purchase of shares from secondary market do not fall within the ambit of SEBI (ESOS and ESPS) Guidelines.
Employees not eligible for ESOP/ESPS include promoters, directors and those directly or through relatives or corporate bodies having over 10% stake in the company.
However, these restrictions do not apply if the staff welfare schemes do not come under Sebi's ESOS or ESPS guidelines. As a result, Sebi fears, the promoters by virtue of their direct or indirect control over such Trusts can get to control additional voting power.
Also, there is lack of consistency in disclosure of such shares held by trusts under shareholding pattern filed with stock exchanges. While in some cases, these shares were disclosed under promoter group, whereas in some cases, these shares are disclosed as part of public shareholding.
Provisions relating to pricing, lock-in, accounting policies, disclosure, among others, are also not applicable to such employee benefit schemes.
Sebi feels that allowing listed companies to have their own stock options or stock purchase schemes, which are not covered by SEBI (ESOS & ESPS) Guidelines may lead to each company proposing their own schemes.
As a result through such schemes, company’s funds may be used for manipulating its own securities by dealing in secondary market transactions, Sebi feels.
Such dealing in the company's shares by the Trusts raises concern regarding compliance with Sebi rules for Prohibition of Fraudulent and Unfair Trade Practices and also the Prohibition of Insider Trading Regulations.
The issues have been also discussed by Sebi's Primary Market Advisory Committee (PMAC).
The PMAC also opined that secondary market trading by such Trusts should not be allowed.
Accordingly, Sebi has decided to restrain listed firms from framing any employee benefit scheme involving acquisition from secondary market.
Sebi has also decided to convert its ESOS and ESPS Guidelines into Regulations, which would address all the prevailing concerns, as also the issues related to composition of employee welfare trusts and required disclosure.
The changes with regard to prohibition of purchase of shares from secondary market are being made immediately to avoid any manipulation through such unregulated employee benefit schemes.