Market regulator Securities and Exchange Board of India (Sebi) has proposed a major overhaul of stock-related employee benefit schemes, to allow companies purchase shares from the open market.

The regulator, in January 2013, had prohibited secondary market purchases by employee welfare trusts or under employee stock ownership plan (ESOP).

However, to provide flexibility to listed companies and to align regulations with international practice, Sebi has recommended secondary market purchase through the trust mechanism for issuing shares to employees under various benefit schemes. If the company has to issue fresh shares to employees, it will have the flexibility to do it directly to employees or through trust.

Sebi, which today floated a discussion paper to review guidelines governing employee stock benefit schemes, has proposed to issue umbrella regulation that will cover all employee benefit schemes such as ESOP, employee stock purchase scheme (ESPS) and stock appreciation right (SAR). The regulator has recommended a two year transition period to implement the new recommendations.

Sebi has said purchase of shares from the secondary market should be allowed, subject to a ceiling of 2% of paid up capital per financial year and overall ceiling of 5% on secondary market purchases by all kinds of ESOP schemes.

"It was felt that secondary market acquisitions by trusts being an internationally accepted practice should be considered subject to necessary safeguards to prevent misuse...secondary market acquisitions allow companies to grant options to employees without having to dilute their existing share capital," Sebi said in the discussion paper.

If the company wishes to grant shares even after hitting the ceiling, it can do it by issue of fresh shares.

Sebi recommended a minimum holding period of six months for shares acquired from the market. However, the holding period will not apply once the shares are transferred to employees. Earlier, the regulations only allowed primary issuance of shares and had a minimum vesting period of one year.

The employee benefit schemes will be subject to disclosure requirements of insider trading and also they will not be allowed to deal in shares during closure period. Takeover core regulations such as open offer, creeping acquisition and other liabilities such as enforcement proceedings will not be applicable to trusts.

The trust will have to be run by independent trustee who can be independent directors or professional familiar with stock market or employee welfare schemes.

Sebi has said promoters or directors cannot be beneficiaries of such schemes. Further, there will be no voting rights on the shares held by the trust. Also, despite managed independently, trust holding will be treated as promoter holding. If promoter holding is already 75%, then trust cannot acquire more shares from the secondary market. However, when trust transfers shares to employees it will automatically become public shareholding.

The regulator has invited public comments and suggestions on the discussion paper till December 5, 2013 on the changes it has proposed to ESOP schemes.

As the current ESOP guidelines were silent on acquisition of shares from the secondary market, a lot companies had framed schemes to deal in their own securities. “It was apprehended that some entities may frame such schemes with the purpose of dealing in their own securities with the object of inflating, depressing, maintaining or causing fluctuation in the price of the securities by engaging in fraudulent and unfair trade practices,” Sebi said in the discussion paper.

Subsequently, Sebi had prohibited secondary market acquisitions by employee welfare trusts and had asked existing schemes. (Business Standard)