ESOP TRUSTS DISALLOWED FROM BUYING CO. SHARES FROM SECONDARY MARKETS

SEBI, vide its Circular dated January 17th 2013 has come out with an amendment to the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 and a consequent amendment to the Equity Listing Agreement as well.

SEBI through SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 provides an orderly framework for the listed companies to reward their employees through stock option schemes and stock purchase schemes. These regulations contain detailed provisions, with regard to any ESOP/ ESPS scheme of a listed entity. Whereas it was observed by SEBI that some listed entities, while framing their ESOP Schemes had created the Trusts to deal in their own securities in the secondary market, which was not envisaged within the purview of SEBI (ESOS and ESPS) Guidelines 1999. Thus, it has been decided to prohibit the listed entities from framing any employee benefit schemes involving acquisition of own securities from the secondary market. Also clause 35C has been inserted in the Equity Listing Agreement for the same.

As Corporates are aware that ESOPs can be issued either under the Direct Allotment Route or through the Trust Route. Under the Direct Allotment route, as the name suggests, direct fresh allotments are made to employees, as and when they exercise the Options. As against this, in the Trust Route, the Companies were either making fresh allotments to the Trusts or the Trusts were authorized to acquire/ buy the shares from the market as and when deemed appropriate, to be ultimately transferred to the concerned employees, as and when they exercise the options.

The amendment is with reference to the latter type of transactions, involving acquisitions by the Trusts from the secondary markets.

The said amendment has been brought out with the obvious apprehension that such Schemes/ Trusts might have been created with the object of inflating, depressing, maintaining or causing fluctuation in the price of the securities by engaging in fraudulent and unfair trade practices. Such dealings also raise various regulatory concerns regarding compliance SEBI (FUTP) Regulations as well as Insider Trading Regulations.

It has also been mandated that those companies, which have already framed and implemented before the date of this circular any employee benefit schemes involving dealing in the securities of the company, which are not in accordance with the SEBI Guidelines, such companies will be required to inform the details of their schemes to the Stock exchanges within 30 days from date of the circular (in the prescribed format) and shall also align any existing employee benefit schemes with SEBI (ESOS and ESPS) Guidelines on or before 30th June 2013.

It can thus be inferred that from now on, the Employee Welfare Trusts will not be allowed to acquire any shares from the Secondary Market and can only be issued fresh shares, for being transferred to the Employees, as and when they exercise the Options vested to them. Furthermore, any such Schemes/ Trusts in existence, will have to be accordingly amended to be in consonance with the SEBI Guidelines, by 30th June 2013.

SEBI Guideline_Practical Problems_1

The Balance Sheet of Get Well Soon Ltd. as at 31.3.2009 disclosed the following details:
(i) Authorized share capital Rs. 400 crores
(ii) Paid up share capital Rs. 150 crores
(iii) Reserves and surplus Rs. 750 crores
The company has issued in the year 2004, Fully Convertible Debentures of Rs. 100 crores which are due for conversion in the year 2009. The company proposes, after conversion of Debentures to issue Bonus shares in the ratio of 1 1. Explain briefly the requirements of the Companies Act, 1956 and the Securities and Exchange Board of India (SEBI) guidelines to be followed by the company in this regard.

Does IPO grading consider the price at which the shares are offered in the issue?

No. IPO grading is done without taking into account the price at which the security is offered in the IPO. Since IPO grading does not consider the issue price, the investor needs to make an independent judgment regarding the price at which to bid for/subscribe to the shares offered through the IPO.

Can the issuer company reject an IPO grade?

IPO grade/s cannot be rejected. Irrespective of whether the issuer finds the grade given by the rating agency acceptable or not, the grade has to be disclosed as required under the DIP Guidelines. However the issuer has the option of opting for another grading by a different agency. In such an event all grades obtained for the IPO will have to be disclosed in the offer documents, advertisements etc.

When am I required to obtain the grade for the IPO?

IPO grading can be done either before filing the draft offer documents with SEBI or thereafter. However, the Prospectus/Red Herring Prospectus, as the case may be, must contain the grade/s given to the IPO by all CRAs approached by the company for grading such IPO.Further information regarding the grading process may be obtained from the Credit Rating Agencies.

What is ‘IPO Grading’?

IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date. The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. Such grading is generally assigned on a five-point point scale with a higher score indicating stronger fundamentals and vice versa as below.
IPO grade 1: Poor fundamentals
IPO grade 2: Below-average fundamentals
IPO grade 3: Average fundamentals
IPO grade 4: Above-average fundamentals
IPO grade 5: Strong fundamentals
IPO grading has been introduced as an endeavor to make additional information available for the investors in order to facilitate their assessment of equity issues offered through an IPO.

What is the difference between Voluntary delisting and Compulsory delisting?

Compulsory delisting refers to permanent removal of securities of a listed company from a stock exchange as a penalizing measure at the behest of the stock exchange for not making submissions/comply with various requirements set out in the Listing agreement within the time frames prescribed. In voluntary delisting, a listed company decides on its own to permanently remove its securities from a stock exchange.

What is meant by delisting of securities?

The term "delisting" of securities means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange.