Employee stock option scheme and employee stock purchase scheme guidelines 1999


Retention of talented employees is essential for the growth and brand value of the company. The traditional methods of retaining and motivating employees are no more sufficient to fulfil the self-esteem employee stock option scheme and employee stock purchase scheme guidelines 1999 of the Employees.

Employee Stock Option Plan ESOP is considered as one of the most contemporary and important tool to retain human assets of the Company and to reward the high potential employees. The feeling of ownership acts as a motivational boost for the employees to have long-term aspirations and association with the organisation.

Under ESOPs, the options based upon the eligibility criteria of the Employees, are issued to them, which an employee after the expiry of the specified period, can convert them into the equity shares of the company and participate in the ownership of the company along with the other shareholders.

Under the Direct Routeas the name suggests, fresh allotments of the Equity shares of employee stock option scheme and employee stock purchase scheme guidelines 1999 company are made to employees, as and when they exercise the options. Further some companies also use TRUST to provide the finance facility to the employees in case at the time of exercise of options, they require fund to make the payments for the options.

Hence the Companies have substantial flexibility to design the ESOPs in any manner catering to their needs as well as the needs of the Employees, by using either of the alternatives or combination of both Direct Route and Trust Route. The current guidelines, already provides enough room to the Companies to frame their Plans and use Trust to administer it. As there was no restriction on the purchase of shares from the secondary market by the Trust for creating a pool of shares for transferring them to the Employees as and when they exercise, the Market Regulator observed that some companies had created the Trusts only with the intent to purchase and sell the shares in the Secondary market under the umbrella of the ESOP Scheme with the sole objective to inflate, depress, maintain or fluctuate the price of their own employee stock option scheme and employee stock purchase scheme guidelines 1999 by engaging in fraudulent and unfair trade practices, which is a highly debarred act under the securities laws of the country.

On analysing the disclosures filed by the Listed Entities, we observed that: On analysing the trend related to secondary market purchase by the Employee Welfare Trusts, it can be inferred that although the prime objective of all these Trusts is to purchase shares from the secondary market for transferring benefits at later stage to the Employees of the Company.

But, simultaneously, the Trusts might also be selling these shares in the secondary market during the due course of time that may directly or indirectly influence market stability and share prices of the company on the Stock Exchange s. These kinds of share transactions were leading to creation of a false market. Furthermore many of these companies are not showing these Employees Welfare Trust as part of Promoter Group, which again is also a wrong disclosure as per the SEBI disclosure norms.

The above mentioned Analysis can be depicted with the help of the following diagram: From all the above, it is very clear that the aforesaid practices are not in line with the intents of the law makers as the Employee Welfare Trusts are being used as portfolio managers for the Promoters, which, for obvious reasons, is a non acceptable proposition.

With the objective of aligning the existing Employee Welfare Schemes and working of the Employees Welfare Trusts, SEBI itself, vide the said Circular, had prescribed the following two modes for diluting the shareholding acquired by the said Employees Welfare Trusts from the Secondary Market by 30th June, How the Companies proposed to deal with the said shares held by the Employee Welfare Trusts after the Circular dated 17th January, On analysing the disclosures filed by the listed entities, it was observed that majority of the companies appx.

SEBI had although suggested the way outs for such Trusts employee stock option scheme and employee stock purchase scheme guidelines 1999 in our opinion, under both the options suggested by SEBI, there were certain fall outs, which might need to be addressed by the Regulator. For instance, if a Company goes in for option 1, i. Likewise, for the 2nd option, i. Further, the 2nd option may raise various concerns related to accounting aspect for the substantial loss or gain that may arise on account of bulk selling of the shares by the Trusts.

SEBI vide its Circular dated 14th May, has addressed various representations seeking clarification on the applicability of the Circular dated 17th January, and the shortcomings in the modes suggested for dilution of shareholding by the Trusts. By appreciating the concerns that have a direct bearing on the Capital Market and at the public at large, SEBI has allowed Trusts to hold the Securities acquired prior to 17th January, beyond the date specified for alignment of the schemes provided that the schemes have been aligned with SEBI ESOS and ESPS Guidelines and such securities are used only in accordance with such aligned schemes.

SEBI has further mandated the Listed Entities to disclose further details related to the Schemes to the Stock Exchanges by June 30, and in order to keep an eye on the listed entities, has further casted a responsibility on the listed entities to submit details related to allotments made or options granted post 17th January, and up to 31st December, within 7 days from the end of the quarter.

In this regard, upon receipt of various representations seeking clarification on the applicability of the Circular and for extension of time period for dilution of shareholding by the Trusts, SEBI has further come out with the subsequent amendment in order to address various ambiguities for dilution of shareholding by the Trusts and its impact on the Capital Market. With this initiative of SEBI, it can be said that the SEBI has addressed almost all the commercial difficulties to create hassle free corridor for the Listed Entities on one hand and protected interest of public at large on the other.

The entire contents of this document have been developed on the basis of relevant statutory provisions and the information available at the time of the preparation. Though the author has made utmost efforts to provide authentic information however, assumes no responsibility for employee stock option scheme and employee stock purchase scheme guidelines 1999 errors which despite all precautions, may be found herein.

The author and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.

ESOP give the employee a right to buy a specific number of company's shares at a fixed price within a certain period of time. On analysing the disclosures filed by the Listed Entities, we observed that:. With the intent to bring transparency in the operations of the Trusts formulated for extending Welfare Benefits to the Employees, SEBI vide its Circular dated 17th January, restricted the Employee Welfare Trusts to buy shares from the secondary market and to dilute their existing holding by 30th June, Phantom Stocks unique blend of Employee appreciation, with no Equity dilution.