1.ESOP Trusts in Listed Companies: An Analytical ReviewRetention of talented employees is essential for the growth and bra...
For Listed Entities, SEBI through SEBI (Employee Stock Option Scheme and Employee StockPurchase Scheme) Guidelines, 1999 p...
•Almost 36% companies have reported that though they have established Employee WelfareTrusts but they don’t have actual op...
From all the above, it is very clear that the aforesaid practices are not in line with the intentsof the law makers as3.th...
(b) for extension of time from the 30thJune, 2013 for diluting entirestake held by Employee Welfare Trusts.3.3. Shortcomin...
SEBI has further mandated the Listed Entities to disclose further details related to theSchemes to the Stock Exchanges by ...
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ESOP Trusts in Listed companies: An Analytical review


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Research team of Corporate Professionals has undertaken an in-depth analysis of the disclosures filed by the listed entities, with BSE & NSE, with regard to their Employee Benefit Schemes and Trusts formed for such purpose pursuant to the circular dated 17th January, 2013 and by doing the same, we have tried to study the different ESOP Trust routes followed by these entities & their future plans to deal with the same.

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ESOP Trusts in Listed companies: An Analytical review

  1. 1. 1.ESOP Trusts in Listed Companies: An Analytical ReviewRetention of talented employees is essential for the growth and brand value of the company. Thetraditional methods of retaining and motivating employees are no more sufficient to fulfil the selfesteem needs of the Employees.Employee Stock Option Plan (ESOP) is considered as one of the most contemporary andimportant tool to retain human assets of the Company and to reward the high potentialemployees. The feeling of ownership acts as a motivational boost for the employees to have long-term aspirations and association with the organisation.Background:Under ESOPs, the options based upon the eligibility criteria of the Employees, are issued tothem, which an employee after the expiry of the specified period, can convert them into the equityshares of the company and participate in the ownership of the company along with the othershareholders.ESOPs in the company can be issued either directly to the employees of the Company (DirectRoute) or through an Employee Welfare Trust (Trust RouteUnder the).Direct Route, as the name suggests, fresh allotments of the Equity shares of thecompany are made to employees, as and when they exercise the options. As against this, underthe Trust Route, the Companies either make fresh allotments of the Equity Shares of thecompany to the Trusts or these Trusts, , were authorized to acquire/ buy the shares from themarket as and when they deemed appropriate, and the Equity Shares, so allotted or acquired, bythe Trusts from either of the ways, to be ultimately transferred to the concerned employees, as orwhen they exercise the options.Further some companies also use TRUST to provide the finance facility to the employees in caseat 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 totheir needs as well as the needs of the Employees, by using either of the alternatives orcombination of both Direct Route and Trust Route.Direct Route Trust RouteESOP IssuanceRoutes
  2. 2. For Listed Entities, SEBI through SEBI (Employee Stock Option Scheme and Employee StockPurchase Scheme) Guidelines, 1999 provides an orderly framework to reward their employeesthrough stock option schemes (ESOPs) and stock purchase schemes (ESPSs). The currentguidelines, already provides enough room to the Companies to frame their Plans and use Trust toadminister it.However, it was observed by SEBI that some listed entities were taking advantage of these wideropportunities for framing the ESOP Schemes. As there was no restriction on the purchase ofshares from the secondary market by the Trust for creating a pool of shares for transferring themto the Employees as and when they exercise, the Market Regulator observed that somecompanies had created the Trusts only with the intent to purchase and sell the shares in theSecondary market under the umbrella of the ESOP Scheme with the sole objective to inflate,depress, maintain or fluctuate the price of their own shares by engaging in fraudulent and unfairtrade practices, which is a highly debarred act under the securities laws of the country.Thus, SEBI vide its Circular dated 17thJanuary, 2013 came out with an amendment in the SEBI(ESOP and ESPS) Guidelines, 1999. Pursuant to the said amendment, SEBI has restrained theTrust of listed entities to buy shares from the secondary market for creating a pool ofshares for the ESOP Schemes,2.and has mandated all listed companies having operationalEmployee benefit schemes involving purchase of shares by Trust from open market, to align theirschemes as per the amendment and has further directed to undertake one-time reporting ofcertain details vis-à-vis the scheme and dealings in secondary market by the Trusts within aperiod of 30 days from the date of the said circular as per the prescribed format.Our analysis is based on the corpus of disclosures filed with the Stock Exchange(s) as per theSEBI’s directive, by 30 Listed Entities who have active Employee Welfare Schemes and/ orTrusts. On analysing the disclosures filed by the Listed Entities, we observed that:Our Analysis:•On analysing the trend related to secondary market purchase by the Employee WelfareTrusts, it can be inferred that although the prime objective of all these Trusts is to purchaseshares from the secondary market for transferring benefits at later stage to the Employees ofthe Company. But, simultaneously, the Trusts might also be selling these shares in thesecondary market during the due course of time that may directly or indirectly influencemarket stability and share prices of the company on the Stock Exchange(s). These kinds ofshare transactions were leading to creation of a false market.Approximately 66% of such Companies have formulated Employee Welfare Trust topurchase shares from the secondary market instead of fresh allotment to the Trust.
  3. 3. •Almost 36% companies have reported that though they have established Employee WelfareTrusts but they don’t have actual operational ESOP schemes. The fact that the ESOP Trustare currently undertaking transactions under the cloak of using them in future under ESOPScheme clearly highlights the fact that they were being formed not with the real motive oftransferring shares/benefits to the Employees but are being used for purposes totallydifferent than employee welfareApproximately 36% Companies have formed the Employee Welfare Trusts with no backingof ESOP Schemes:•To further elaborate this pointQuite interestingly, approximately 23% of such Companies have Non-Independent EmployeeWelfare Trusts and out of which only approx. 21% of such Trusts are been supported byESOP Scheme., Non-Independent Employee Welfare Trusts are the Trustsformed for the Employees’ benefit but are been regulated by the Promoters of the company inthe capacity of Trustees of these Trusts. Also as per the disclosure norms of the SEBI, theidentity of the Trustees is the identity of the Trusts.From the disclosures filed, it has been observed that approximately 79% of the Companieswith Non-Independent Employee Welfare Trusts have actually no operational ESOPscheme and inference can be drawn that these Trusts are merely acting as marionetteswhich are being used for dual purposes, on one hand as a device to facilitate transfer ofshares upon exercise of options by the Employees in future , on other hand can also be usedto safeguard the Promoters Interest in the company.Furthermore many of these companies are not showing these Employees Welfare Trust aspart of Promoter Group, which again is also a wrong disclosure as per the SEBI disclosurenorms.The above mentioned Analysis can be depicted with the help of the following diagram:Secondary Market PurchaseFresh AllotmentFresh Allotment cumSecondary Market PurchaseAcquisitionof shares via any other mode
  4. 4. From all the above, it is very clear that the aforesaid practices are not in line with the intentsof the law makers as3.the Employee Welfare Trusts are being used as portfolio managersfor the Promoters, which, for obvious reasons, is a non acceptable proposition.Options made available with the Companies/ Trusts as per SEBI Circular dated 17thJanuary, 2013:3.1.With the objective of aligning the existing Employee Welfare Schemes and working of theEmployees Welfare Trusts, SEBI itself, vide the said Circular, had prescribed thefollowing two modes for diluting the shareholding acquired by the said EmployeesWelfare Trusts from the Secondary Market by 30The pertinent question that arouse after this circular came into force was whatoptions would be available to the Companies/ Trusts that are already in existenceand which, till now, had been doing market acquisitions.th3.1.1 by transferring shares to the Employees covered under theESOP/ESPS Scheme; orJune, 2013:3.1.2 by selling the shares in the secondary market thereby transferring thebenefits of the Employees.3.2. How the Companies proposed to deal with the said shares held by the EmployeeWelfare Trusts after the Circular dated 17thJanuary, 2013:3.2.1 On analysing the disclosures filed by the listed entities, it was observedthat majority of the companies (appx. 82%) have planned to dilute orto sell the Trust shares in the secondary market through StockExchanges.3.2.2 Another set of approximately 16% of such listed entities have plannedto approach the Market Regulator either for :-(a) seeking a clarification with regard to disposal of shares mainlyacquired by the Employee Welfare Trusts pursuant to any schemeof merger or transfers received from the Trusts of Holding/Subsidiary Company or through any other mode including marketpurchase also; and/ or,
  5. 5. (b) for extension of time from the 30thJune, 2013 for diluting entirestake held by Employee Welfare Trusts.3.3. Shortcomings in the mode suggested by SEBI vide Circular dated 17thSEBI had although suggested the way outs for such Trusts but in our opinion, under boththe options suggested by SEBI, there were certain fall outs, which might need to beaddressed by the Regulator. For instance, if a Company goes in for option 1, i.e.transferring the shares to the employees, this option would depend upon the life cycle ofthe ESOP Scheme of the concerned Company. If the Vesting/ the Exercise Periods havenot expired, the transfer of shares to the employees would not be feasible.Likewise, for the 2January,2013:ndoption, i.e. selling the shares in the Secondary Market, if the saidTrusts put in a large stock for sale in the market, the running scrip prices would plungedown, thus resulting in fall in the market capitalisation and various other related issueswhich can be sighted as a major peril for the capital markets.Further, the 2nd3.4.option may raise various concerns related to accounting aspect forthe substantial loss or gain that may arise on account of bulk selling of the sharesby the Trusts.SEBI’s initiative to address the apprehensions related to Circular dated 17thSEBI vide its Circular dated 14January, 2013:thMay, 2013 has addressed various representationsseeking clarification on the applicability of the Circular dated 17thJanuary, 2013 and theshortcomings in the modes suggested for dilution of shareholding by the Trusts.SEBI, keeping in view the representations received, has extended the time-frame foraligning the scheme in consonance with the SEBI (ESOS & ESPS) Guidelines, 1999 from30thJune, 2013 to 31stDecember, 2013 with a stipulation that any further grant postCircular dated 17thJanuary, 2013 shall be strictly in accordance with the SEBI Guidelines.By appreciating the concerns that have a direct bearing on the Capital Market and at thepublic at large, SEBI has allowed Trusts to hold the Securities acquired prior to 17thJanuary, 2013 beyond the date specified for alignment of the schemes provided that theschemes have been aligned with SEBI (ESOS and ESPS) Guidelines 1999 and suchsecurities are used only in accordance with such aligned schemes.
  6. 6. SEBI has further mandated the Listed Entities to disclose further details related to theSchemes to the Stock Exchanges by June 30, 2013 and in order to keep an eye on thelisted entities, has further casted a responsibility on the listed entities to submit detailsrelated to allotments made or options granted post 17thJanuary, 2013 and up to 31st4December, 2013 within 7 days from the end of the quarter.With the intent to bring transparency in the operations of the Trusts formulated for extendingWelfare Benefits to the Employees, SEBI vide its Circular dated 17Impact of the SEBI Circular- Our ViewpointthJanuary, 2013 restricted theEmployee Welfare Trusts to buy shares from the secondary market and to dilute their existingholding by 30thJune, 2013. In this regard, upon receipt of various representations seekingclarification on the applicability of the Circular and for extension of time period for dilution ofshareholding by the Trusts, SEBI has further come out with the subsequent amendment in orderto address various ambiguities for dilution of shareholding by the Trusts and its impact on theCapital Market. With this initiative of SEBI, it can be said that the SEBI has addressed almost allthe commercial difficulties to create hassle free corridor for the Listed Entities on one hand andprotected interest of public at large on the other. However, certain issues related to the holdingsof the Employee Welfare Trusts that are not been backed by any operational ESOP/ESPSSchemes, still need to be addressed.From all the above, it can be concluded that like two sides of a coin, SEBI’s Circulars aresurely considered as a welcome step for putting an end to the unfair practices beingfollowed by some listed entities under the garb of doing welfare activities for theiremployees whereas on the other hand, it is like a castigation for those Companies whoare using the Trust Route with bona fide intent to reward Employees and arecontinuously working towards creating real wealth for their real jewels i.e. Employees.Disclaimer:The entire contents of this document have been developed on the basis of relevant statutory provisions and theinformation available at the time of the preparation. Though the author has made utmost efforts to provide authenticinformation however, assumes no responsibility for any errors which despite all precautions, may be found herein.The material contained in this document does not constitute/substitute professional advice that may be requiredbefore acting on any matter. The author and the company expressly disclaim all and any liability to any person whohas read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to bedone by any such person in reliance upon the contents of this document.