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SEBI issues press release regarding proposed amendments to ESOP guidelines

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The Securities Exchange Board of India, in a Press Release has approved the proposals to review the existing regulatory framework on Employees Stock Option Plan (ESOP) Guidelines and also mentioned …

The Securities Exchange Board of India, in a Press Release has approved the proposals to review the existing regulatory framework on Employees Stock Option Plan (ESOP) Guidelines and also mentioned certain proposed safeguards for ESOP schemes.


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  • 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG in INDIA SEBI issues press release regarding proposed amendments to ESOP guidelines 20 June 2014 Background The Securities Exchange Board of India (SEBI), in a Press Release 1 has approved the proposals to review the existing regulatory framework on ESOP (Employees Stock Option Plan) guidelines 2 . The ESOP guidelines were last amended in January 2013 3 , to prohibit companies from buying/selling its own securities in the secondary market for ESOP purposes. For alignment with the amended guidelines, SEBI had given the listed companies having such ESOP Schemes due date of 30 June 2013. Thereafter, through another Circular 4 , the timeline was extended to 31 December 2013. The ESOP guidelines were last amended as it was noticed that some listed companies have schemes plans administered through the Trust route, which deals in the company’s own shares in the secondary market, for issuance to the employees. 1 SEBI Press Release No. 63/2014, dated 19 June 2014 2 SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) guidelines, 1999 3 Amended through Circular No. CIC/CFD/DIL/3/2013, dated 17 January 2013 4 Circular No. CIC/CFD/DIL/7/2013, dated 13 May 2013 SEBI, in response to various representations received from the Industry, has issued a Press Release approving the proposals to review the existing regulatory framework and to frame regulations for employee benefit schemes involving shares of the company, replacing the existing ESOP guidelines. Key proposals  The proposed regulations intend to address issues regarding composition of Trusts, facilitate secondary market acquisitions, enhanced disclosures and better enforceability.  The proposed regulations would cover employee benefit schemes which deal in shares of the company, in addition to Employees Stock Option Scheme (ESOS) and Employees Share Purchase Scheme (ESPS).  Such schemes would also be permitted to acquire shares from secondary market under certain conditions so as to avoid forced dilution of capital and to be in line with international practice.
  • 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  Following safeguards have been put in place to improve governance and transparency of the schemes and also address concerns regarding potential market abuse:  Requirement of shareholders’ approval through special resolution for undertaking secondary market acquisitions;  Certain limits on secondary market acquisitions;  A limit of 10 per cent of the assets held by general employee benefit schemes other than ESOS type of schemes on owning shares of the company/ listed holding company;  Trusts shall undertake only delivery based transactions and not deal in derivatives;  Restrictions on sale of shares by the Trusts;  At least six month holding period for shares acquired from secondary market;  Classifying shareholding of such Trusts separately from ‘promoter’ and ‘public’ category;  Stricter disclosure and other regulatory obligations.  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 from the date of notification has been provided for the following:  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.  Reducing own share component to 10 per cent of the total assets of general employee benefit schemes. Our comments This proposed amendment will provide a breather to the listed companies by allowing the purchase of shares from the open market through a trust for employee benefit. Promoters worry of shareholding dilution while framing ESOP schemes, this issue would be addressed once a formal process of buying shares from the market is put in place, with safeguards specified by SEBI. SEBI is yet to specify the permissible limits for acquisition of shares from the secondary market. This limit would have significance for existing schemes and proposed schemes that listed companies are contemplating. SEBI is also yet to specify the stricter disclosure requirements, which could have implications on companies from an administrative perspective. It will become essential for the listed companies to relook at their ESOP and non-ESOP equity-linked schemes and ensure that they are in line with the ESOP guidelines, once amended. Note: The subject press release also specifies certain other topics, which have not been covered in this flash news.
  • 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903, Near Vodafone House, Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.