Fixed pay structure will no longer help PSBs retain talent.

Fixed pay structure will no longer help PSBs retain talent.

The idea of considering Employee Stock Options (ESOPs) in Public Sector Banks have been in talks for more than 5 years. In August 2015, Government announced to introduce ESOPs for the employees of PSU Banks. However there has been an air around actual implementation of the aforesaid idea. After a prolonged hassle of almost two years, the Finance Ministry has finally given its consent to implement ESOPs in PSU Banks.

The ministry is anticipating an improved performance and efficiency in the employees of PSBs due to introduction of this concept. This will make the employees of PSBs feel more valued and aligned to their work and targets and will lead to increase in bank’s profitability.

Read More..

Will Budget 2017-18 render ESOPs unattractive?

Will Budget 2017-18 render ESOPs unattractive?

The Finance Minister, Mr. Arun Jaitley, announced the Budget for 2017-18 on 1st of February, 2017. Under the Annexure III to Part B of Budget Speech, certain Additional Revenue Mobilisation (ARM) and Anti-abuse Measures in the area of Direct Taxes were announced. This included the proposal to restrict the exemption from long term capital gains in case of transfer of listed shares by providing that the exemption, subject to notification of certain exceptions, shall be available if security transaction tax has been paid at the time of acquisition of such shares where they have been acquired after 1st October, 2004.

The present provision in this regard is, Section 10(38) of the Income Tax Act exempts the long term capital gains arising in case of transfer of equity shares on or after 01-10-2004, where such transaction is chargeable to securities transaction tax (STT). However this provision has been modified in the latest budget and it is now proposed to levy tax on transfer of listed shares if the STT is not paid at the time of acquisition of such shares.

While certain allotments like IPOs, FPOs, Bonus or Rights Issues, acquisition by Non-Resident under FDI Policy etc. have been clearly excluded from applicability of the aforesaid provision on the grounds that in these cases STT cannot be paid at the time of acquisition of shares. However there are many more types of allotments of equity shares where the payment of STT cannot be made at the time of acquisition of shares. These include Private Placements, Employee Stock Options, conversion of convertible securities etc. Taking the example of ESOPs, wherein Employees are given a right to obtain the equity shares of the company at a pre-determined price and the employees can acquire shares of the company either by way of fresh allotment or through transfer of shares from the Trust. In case of fresh allotment, there is no question of paying STT upon acquisition. Even in cases where the Trust route is opted by the listed company and the trust acquires shares of the company from secondary market, the STT will be paid when the Trust will acquire shares. However the transfer of shares from Trust to employee will be an off-market transaction. In this manner, employee can never pay STT at the time of acquisition of ESOP Shares-neither in case of fresh acquisition nor in case of Trust route. Accordingly, the benefit of holding ESOPs for long term will not be available anymore.

By the announcement of this Budget, ESOPs and Private Placements have been put under grey area as there is no explicit clarity over the exemption from long term capital gains arising upon transfer of these shares by the holder of such shares. This will lead to dilution of the basic idea of wealth creation and retention of employees by granting ESOPs to them. They will not get any benefit by opting and holding ESOPs for a longer period.

Presently these are the specimen provisions and the actual exemptions are yet to come. Regulators need to consider to exempt ESOPs as well as Private Placements from the levy of long term capital gain tax upon non-payment of securities transaction tax at the time of acquisition.

Will Budget 2017-18 render ESOPs unattractive?

DEMONETISATION… not Demotivation!

DEMONETISATION… not Demotivation!

Motivating the Employees inspite of Demonetisation blues

The preceding year 2016 has given few gigantic reforms which are going to lay an impact worldwide. PM Modi’s surprise in the form of Note Ban in India is one of a major reform and whether this will prove to be a boon or a bane is still to be seen..!

A very bold move was taken by Shri Narendra Modi, our Prime Minister, on November 8th, 2016, when he announced that all 500 and 1000 rupee notes cannot be used anymore thereby giving a jolt to the country. This move is backed by his idea to curb black money circulation in India and thereby making it a corruption free place. But it is still to be concluded that how far this course of action will prove to be justified for the entire nation?

The major hit is been faced by the salaried class people of the country. The sudden invalidation of 500 and 1000 rupee notes which accounted upto 85% of the cash circulation in the country represented a significant monetary shock. Research have also shown that this black money accounted for a significant portion of India’s GDP. By putting this currency out of circulation, the overall GDP is also expected to low down in the short run. The brunt is being felt by all across industries, be it FMCG, Pharma, Manufacturing, Telecom, Infrastructure, BFSI etc.

However, the proverb “No gain without pain” holds true here as well. The ultimate idea is to seek a better future and fiscal growth of the country resulting out of a corruption free India. In the longer run, tax and interest rates on loans are expected to come down as higher income tax collections arising from better compliance would offer scope to reduce rates over the long term. The cash crunch has drawn all the attention and the industrialists are now focusing just to save the potential losses and to overcome the downfall faced by them.

Jobs & Appraisals

Nevertheless the above, the pain becomes more painful when it starts to pinch the general masses. In such critical time, it is important to hold on to the key builders of businesses i.e. the employees to support the businesses to revive back. . The cash crunch has put the employees and workers out of the annual appraisal limelight. While, it can be expected that appraisals are going to be minimal in the year 2017, job change is also not left as an option to the employees to get better hikes. The “startup industry” is on the verge of shutting down due to this cash crunch.

Even if the revenues are on a slight downfall for the time being, this does not in any way mean that no other appraisal tools are available! Companies should aim to find ways to engage the employees with them rather than focusing only on paying them off. It will result in more loyal, harder working employees. Making Employees a stakeholder in the Company’s growth will also motivate the Employees to work effectively and efficiently in order to enhance the profitability of the business.

DEMONETISATION… not Demotivation!

Go Cashless with ESOPs

When the entire country is getting cashless, why to stay behind for appraisals!! Effective appraisal tools in the form of Equity Incentives are very much prevalent across industry. Employee Stock Option Plans, popularly known as ESOPs wherein the equity of the company is shared with the employees is gaining acceptance as well as attention in the market as an alternate to cash compensation. Over the years, ESOP has gained worldwide recognition and is now a most attractive tool for employee reward and retention.

Companies are keen to adopt this strategy over vanilla increments. While cash has always been a short term motivator, ESOPs are a dual benefit strategy for both employees as well as the owners. Equity-based incentive plans create a sense of belongingness among Employees as they get directly linked with the growth of the Organization. It makes the Employees think and work as an intra-preneur & motivate them to work effectively and efficiently in order to enhance the profitability of the business.

Equity linked incentives gain all the more significance in the present cash crunched country. Under the present scenario, ESOPs can be prove to be real savior and can rescue both for the corporates who are cash-short and for their staff who is expecting the usual annual appraisals. Stock Option Plans are cashless compensation strategies which act as catalyst for employee behavior, thereby creating successful teams through shared goals. Sharing in equity will not only save the cash outflow from the company but at the same time add value to it by aligning the interests of the employees to the interest of the business and the company. In fact, employees will be paying cash to the company in order to acquire shares under ESOPs thereby generating funds for the company. Companies are extensively focusing on providing various kinds of benefits to their employees over and above the fixed salary. In such a scenario, ESOP can prove to be a carrot, which can be diligently used to reward the employees without cash outflow, and make them a partner in Companys’ growth.

Conclusion

Although the demonetisation policy is facing a lot of criticism however soon we are going to experience much positive effects of this program. It is going to improvise India’s economic and fiscal conditions in the long run. In the meantime we have in place appropriate tools that enable corporates to plan the annual appraisals for their employees by means of offering them equity based incentives i.e. ESOPs. Corporate houses that are implementing or propose to implement ESOPs in this demonetisation period includes names like Reliance Jio, Rolta India, Oracle Financial Service Software Ltd., Carborundum Universal Ltd. etc. The long-term growth potential of a business is directly proportional as to how well it is able to maintain a balance between satisfaction of its employees and preservation of its assets and financial resources. Shared values leads to Shared Success……

Wishing our readers a highly motivated, blissful and prosperous 2017!!

DEMONETISATION… not Demotivation!

ESOP Scenario in Singapore

ESOP Scenario in Singapore

The term ESOP i.e. Employee Stock Option Plans is prevalent worldwide. The concept is no more restricted to a particular country or continent. It originated way back in 1956 in the USA. The first step was taken by the pioneer of ESOP, Mr. Louis Orth Kelso and from that time till now the 50-plus years since then, ESOPs have become a popular alternative to empower employees, a sale or merger as a tool of business succession, and there are now more employee owned companies.

ESOPs started in Singapore in 1975 when Singapore Airlines adopted it. This was followed by Straits Steamship Limited in 1977. Although ESOPs are popular among MNCs, they were not widely received by the local listed companies until the late 1980s.

There are three employee share incentive plans commonly put in place by companies in Singapore, namely:

  • Employee Share Option Plan (“ESOP”): Where the employees can be granted the right but not an obligation, to purchase shares in the future at a pre-determined price, regardless of the fair market value of the shares at the time of grant.
  • Employee Share Awards Plan (“ESAP”): which allows companies to award employees actual shares, rather than options for free.
  • Phantom Share Option Plan (“PSOP”): a Plan wherein the employee gets the cash bonus relating to the increase in the stock value of the company over a specified period of time.

Like in India, in Singapore also the concept of ESOP is regulated by multiple Statues out there which includes the Singapore Companies Act, Listing manual of Stock Exchanges of Singapore, taxation laws of Singapore etc.  Companies are required to obtain approval of Shareholders in a general meeting before adopting ESOPs. There is a requirement of obtaining shareholders’ approval in the general shareholder meeting before any company can adopt ESOPs. Under an ESOP, the options have a minimum vesting period of one-year and a maximum of five years to expiration.

ESOP Scenario in Singapore

There are certain restrictions with regard to ESOPs in Singapore for e.g.: employees who are substantial shareholders (with more than 5 percent share ownership of the company) are not allowed to participate in the plan. The number of shares that can be issued under each plan must not exceed five percent of the total issued share capital for mainboard-listed companies and must not exceed 15 percent for the smaller firms listed on the SES Dealing and Automated Quotation (SESDAQ) system. The number of shares issued to directors, chief executive officers, general managers, and officers of equivalent rank is restricted to 50 percent of the total number of available shares under the plan. The maximum entitlement of each participant is 25 percent of the total number of shares available in the ESOP.

However, all these restrictions, regulations and statutory obligation are associated with the ESOP plans that involves the equity shares of the company and not in case of cash-based incentive plans. As explained above, the name given to these kind of plans is Phantom Share/Stock Option Plans. Since there is no direct involvement or dealing in shares of the company, therefore these are not governed by the laws and rules.

We at esop online.in are into catering all ESOP related needs covering the Legal, Taxation, Regulatory & Management support, thereby building & supporting the corporates with the right amount of remuneration for their employees.

Disclaimer: The data produced in this article has been fetched from publically available information & resources.

ESOP Scenario in Singapore

ESOP COST- An Allowable Expense

Employee Stock Option Plans, as a tool to reward & retain key human talent has gained enormous acceptance and adoption worldwide. Enterprises are more than ever interested in adopting non-traditional methods for making payments to their Employees. Hence ESOPs have become the most popular and accepted form of Employee Compensation.
Emergence of share-based payment as an important means of employee compensation has also generated heated debate on the manner of accounting for such payments. Accordingly the lawmakers have chalked down provisions dealing the same primarily under Guidance Note 18- issued by ICAI on Accounting for Employee Share-Based Payments, supported by relevant Sections under Income-tax Act, 1961. Certain judgments have also been given with regard of allowance of ESOP expenses.

COMPENSATION COST: MEANING

In more concrete terms, ESOP expense is known as Compensation Cost. This is because, employee share-based payments generally involve grant of shares or stock options to the employees at a concessional price or a future cash payment based on the increase in the price of the shares from a specified level. The basic objective of such payments is to compensate employees for their services and/or to provide an incentive to the employees for remaining in the employment of the enterprise and for enhanced performance. Compensation Cost is the difference between the value of Company’s Share at the time of Grant and the price at which the Company has offered the Options to the Employee. This difference becomes the Cost to the Company.

COMPENSATION COST = FAIR MARKET VALUE ON GRANT – EXERCISE PRICE

BOOKING OF COMPENSATION COST

Equity-settled Schemes:
In case of Schemes in which the Employee gets the Equity Shares of the Company against Exercise of Options, Compensation Cost is recognised by the Employer on a straight-line basis over the vesting period of the options. The entire expense is calculated at the time of Grant of Options and it is equally divided over a period within which the options will vest with the Employees, as the case may be.

Cash-settled Schemes:
In case of Schemes, where the Employee gets the incremental value of Company’s Shares over a period of time, the Employer has to make a provision equivalent to the amount to be paid to the Employees in the year in which the payment is to be made.

ALLOWANCE OF COMPENSATION COST

  • The Employer i.e. the Company for whose Employees the Scheme is being framed, shall book compensation cost in its books of accounts;
  • In case the scheme is framed by Holding Company, and it awards benefits to the Employees of its Subsidiary Company(s), then also the compensation cost will be booked by the Holding Company. However, the subsidiary will reimburse the holding company for such expense incurred by the holding company for the employees of the subsidiary company.

TAX TREATMENT

Compensation Cost is an allowable expense under Section 37 of the Income-tax Act, 1961. This is booked as an expense in the Profit & Loss account of the Company and is allowed as a deduction over the period of vesting of options on a straight-line basis.
In case of cash-settled schemes, the expense incurred upon payment of appreciation is booked as a provision in the books of accounts of the company in the year in which payment is to be made.
Let us understand the above-stated concepts with the help of an illustration:

  1. For Equity-settled Schemes
    Options Granted = 1000 FMV on Grant = Rs. 30/-
    Exercise Price = Rs. 10/- per option
    Compensation Cost = Rs. 20/- per option
    Vesting Period Options Vested Compensation Cost (in Rs.)
    100% at the end of 1st year from the date of grant 1000 options 1,000*(30-10) = 20,000

    Therefore, the total compensation cost of Rs. 20,000/- (1000*(30-10)), has to be booked in the year of vesting, by the company in its P&L A/c of the company.

  2. For Cash-settled Schemes
    Options Granted = 1000 FMV on Grant = Rs. 30/-
    Vesting Period Options Vested FMV on Redemption Provision to be made* (in Rs.)
    100% options at the end of 1st year from the date of grant 1000 options Rs. 50/- 1000*(50-30) = 20,000

* It is presumed that the payment of appreciation is being made in year of vesting.

RELATED JUDGEMENTS

In case of CIT vs. LEMON TREE HOTELS LTD, following the Madras High Court in CIT vs. PVP VENTURES LTD (TC(A) No. 1023 of 2005), it was held by Delhi High Court on 4th August, 2015, that expense incurred by the assessee on account of ESOPs is an allowable expense and hence this could be debited to the profit & loss account of the Assessee i.e. the Employer Company.
Also in another case of CIT(A) vs. PEOPLE INTERACTIVE INDIA PRIVATE LTD dated 21st October, 2015, the special bench has held that the discount under ESOP is in the nature of employee cost and hence is deductible during the vesting period w.r.t. to the market price of shares at the time of grant of options to the Employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvested /lapsed options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option.

Continue reading “ESOP COST- An Allowable Expense”

SEBI ENLIGHTED THE GREY AREAS UNDER SEBI (SBEB) REGULATIONS, 2014

SEBI ENLIGHTED THE GREY AREAS UNDER SEBI (SBEB) REGULATIONS, 2014

The Capital Market Regulator, SEBI, has cleared the air around certain grey areas that persisted under the SEBI (Share Based Employee Benefit) Regulations, 2014, which got notified on 28th October, 2014. SEBI, on 21st October, 2015, had issued a FAQ paper which clarified the ambiguities prevailing on part of Regulation 3(12) of the SBEB Regulations, i.e. with regard to appropriation of un-appropriated inventory under an Employee Benefit Scheme. Further, on 20th November, 2015, SEBI issued another FAQ document on the Regulations, thereby clarifying that Independent Directors can exercise the options granted to them before promulgation of these Regulations.

A gist of both the FAQs is given herein below:

SEBI ENLIGHTED THE GREY AREAS UNDER SEBI (SBEB) REGULATIONS, 2014

Clarification w.r.t to Appropriation of Inventory held by the Trust as on the date of the Notification of the Regulations in the year 2014.

As per Regulation 3(12) of the SEBI (SBEB) Regulations, 2014, ‘The un-appropriated inventory of shares which are not backed by grants, acquired through secondary acquisition by the trust under Part A, Part B or Part C of Chapter III of these regulations, shall be appropriated within a reasonable period which shall not extend beyond the end of the subsequent financial year:
Provided that if such trust(s) existing as on the date of notification of these regulations are not able to appropriate the un-appropriated inventory within one year of such notification, the same shall be disclosed to the stock exchange(s) at the end of such period and then the same shall be sold on the recognized stock exchange(s) where shares of the company are listed, within a period of five years from the date of notification of these regulations.

Prior to the clarification issued by SEBI, the prima-facie interpretation of this Regulation suggested that the appropriation of un-appropriated inventory can be done only by way of sale of that inventory on the Recognised Stock Exchange. But now, SEBI has clarified that, the Company may either appropriate the inventory by selling it on the Stock Exchanges or towards individual employees by way of an ESPS/ESOP/SAR/GEBS/RBS, provided that such Plan is framed by the Company on or before 27th October, 2015. This would suffice the requirement of Regulation 3(12), and would be deemed as a compliance with proviso to Regulation 3(12).

In case, such appropriation is not done till 27th October, 2015, then the un-appropriated inventory has to be sold on the Stock Exchanges in the next four years.

Exercise of Options granted to Independent Directors before the promulgation of the Regulations

Initially, upon enactment of the Companies Act, 2013, the Independent Directors, were restricted from participating in any Employee Stock Option Plan. Subsequently, the same also got prohibited under Clause 49 of the Listing Agreement and then under the new SEBI (SBEB) Regulations, 2014. This resulted into a lot of chaos as to what shall be the treatment of grants which have already been made to the Independent Directors. The Regulator has now clarified that in case of listed entities, this restriction applies only to the fresh grants being made after the notification of SEBI (SBEB) Regulations, 2014. Accordingly, any amount of benefit granted to an Independent Director before enforcement of new norms under Companies Act, 2013 is valid and hence, it will vest and can be exercised as per the terms and conditions of the grant.

However, no fresh ESOPs shall be granted to the Independent Directors under the Plans framed after the SBEB Regulations came into picture.

SEBI ENLIGHTED THE GREY AREAS UNDER SEBI (SBEB) REGULATIONS, 2014

Conclusion: CP Viewpoint

Every new enactment brings along both, the solutions and some new questions. The aforesaid two FAQs issued by SEBI are of huge significance for companies having Trusts, along with those who have already granted benefits to their Independent Directors and also a clarification for those who propose to come up with similar kind of Employee Benefit Plans.

 

ESOPs / SWEAT EQUITY TO PERSONS RESIDENT OUTSIDE INDIA

ESOPs / SWEAT QUITY TO PERSONS RESIDENT OUTSIDE INDIA

In today’s globalised arena, where the corporate sector is also widening its arms and becoming borderless, it has become the need of the corporate houses to not only cater the needs of their domestic employees but also extend benefits to the employees who are resident outside India, whether be it the employees of subsidiary or holding company. ESOPs and Sweat Equity have been recognised as the most effective form of rewarding employees, both domestically and globally.

The lawmakers have also kept pace with the requirements of dynamic business world, and have accordingly recognised and ruled out governing provisions for Employee Benefit Schemes, in relevant statutes, be it Companies Act, 2013, SEBI Regulations and now FEMA.

When it comes to participation of foreign employees in the Employee Stock Option Scheme, such a transaction attracts the applicability of the provisions of Foreign Exchange Management Act. The extant regulations stipulated that an Indian Company, issuing shares under ESOS to the employees overseas has to make sure that the face value of such shares does not exceed 5% of the paid-up capital of the Company. The Indian Company was casted with the responsibility to secure compliance with these conditions and the reporting requirements.

The Reserve Bank of India reviewed the same and came up with the Circular dated July 16, 2015, in which the Bank, in addition to the above said requirement, highlighted few more conditions/ pre-requisites which an Indian Company undertaking or which propose to make any issuance of Equity Shares under any Employee Stock Option Scheme or any such scheme, to the employees who are resident outside India, shall adhere to. The same have been outlined below:

    • The Scheme, pursuant to which the shares are being issued to foreign employees, should be in compliance with the SEBI (Share Based Employee Benefit)Regulations, 2014 or SEBI (Issue of Sweat Equity) Regulations, 2002, as the case may be, and Section 62 (read with Rule 12 of Chapter IV) or Section 54 (read with Rule 8 of Chapter IV) of Companies Act, 2013, as the case may be;

The issue to non-resident employees/ directors should be in compliance with the sectoral cap applicable to the said company;

If a Company’s foreign investment is under approval route, then the issue of ESOS/ Sweat Equity shall require prior approval of Foreign Investment Promotion Board.

Even if the Company falls within the Automatic route, issuance of ESOS/ Sweat Equity to citizens of Bangladesh/Pakistan shall require prior approval of the Foreign Investment Promotion Board (FIPB) of Government of India.

A return in Form ESOP shall be furnished within 30 days from the date of issue of shares under ESOP Scheme, to the Regional Office of RBI, by the issuing company;

A declaration shall be given shall be given by the authorized representative of the issuing company, that all the aforesaid conditions have been complied with.

Conclusion

With the intent to regularize the to-and-fro dealings between the Indian Company issuing ESOPs to the person resident outside India, the Reserve Bank of India has streamlined the conditions and requirements to be followed by the parties involved in the transactions, which is in addition to the requirement of the limit of 5% of paid-up capital as well as filing of Form FC-GPR within 30 days from the date of issue of shares under ESOP. Therefore, the Corporate having such Plans/ Schemes shall adhere to the requirements and compliances prescribed.

ESOPs / SWEAT QUITY TO PERSONS RESIDENT OUTSIDE INDIA

ESOPs OUT OF THE GREY AREA

ESOPs OUT OF THE GREY AREA

The promulgation of new Insider Trading norms, which came into effect from May this year, created an air around the Employee Stock Option Plans. With regard to ESOPs, under the new Norms, there were a lot of restrictions, in terms of exercising/ selling/ contra trades/ pre clearance etc. Unlike the PIT Regulations, 1992, ESOPs were not exempted from the purview of the new Insider Trading norms. Accordingly multiple restrictions on trading of shares and all inclusive definitions of term “trading” dragged ESOPs into the wheel.

The norms prohibited employees from entering into contra trades i.e. entering into an opposite transaction within a period of six months of exercise of options or likewise to exercise the options, if there has been and sale transaction during preceding six months. Furthermore even exercise was subject to pre-clearance. The rigidity of the new norms was leading to curb the concept of ESOPs and in fact conventional ESOPs were getting vanished from the scene, with SARs and Phantoms taking the place.

Ever since then, the ESOP ISSUE & THEIR EXERCISE have been a hot topic of discussion amongst the Corporate circles. Various market intermediaries and corporates thus kept approaching SEBI for clarification on applicability and coverage of Insider Trading norms on ESOPs. Consequent to these representations, SEBI took the matter into consideration and gave clarifications on the subject in its meeting held on 24th August, 2015.

Clarifications and Amendments:

  • Clarification on ESOPs in perspective of Insider Trading Norms, 2015
    The Board has issued a Guidance Note under Regulation 11 of SEBI (Prohibition of Insider Trading) Regulations, 2015, which, inter alia, clarifies that exercise of ESOPs is not considered as ‘trading’. This gives the ESOPs a clean chit as now the same does not attract the restriction of contra trade.

    The Guidance Note has clarified the status by way of various situational examples. For instance:

    • If there has been a buy/ sale transaction by any designated employee, there is no restriction on his exercising his Options.
    • Likewise, if he exercises his Options, there is no restriction on his selling/ pledging the same.
    • If there is a combination of market purchase, plus ESOP exercise, then he can sell his ESOP shares without any time period restriction. But the contra trade restriction shall continue to prevail for the shares purchased by him from the market.
    • Likewise, if he has sold any shares, then there is no restriction on ESOP Exercise, but there continues to be a restriction on Purchase of further shares for a period of 6 months from the date of sale of shares.
    • The Guidance Note has also clarified that corporate actions like bonus issue, buybacks, rights, open offers etc are open to designated persons as well and the restriction of contra shall not apply to these actions.

It further clarifies that a Spouse, even if financially independent, is presumed to be an “immediate relative”, unless rebutted so.

Amendments in Share Based Employee Benefit Regulation, 2014

  • SEBI, in its Board Meeting also considered certain amendments in the SBEB Regulations. Gist of the same is as under:
    1. Employees of ‘associate company’, who were allowed to participate in the Employee Benefit Schemes framed under the Regulations, shall now be ineligible to participate as beneficiaries in such a scheme.
    2. The Employee Benefit Trusts will now be allowed to offer shares through stock exchange platform, without any requirement of minimum holding period. This is pursuant to recent amendments to the SEBI Regulations on takeover, buy-back and delisting.
    3. Listed companies with employee benefit Trusts existing as on the date of notification of the SBEB Regulations i.e. 28th October, 2014, were required to re-classify the shareholding of Trust as ‘non-promoter and non-public’category and were to ensure compliance with the requirement of minimum public shareholding within 5 years from the date of notification of the SBEB Regulations. Now this period of 5 years has been curtailed to 3 years.
Conclusion:
The issuance of the Guidance Note will go a long way in helping the Corporates to deal with ESOP related issues. It is now clear that ESOP exercise is generally not a matter connected with possession of UPSI. Removal of contra trade restrictions will help the employees in exercising this compensation tool better.

ESOPs OUT OF THE GREY AREA

PHANTOMS & SARs GET A CLEAN CHIT…

PHANTOMS & SARs GET A CLEAN CHIT…

The concept of notional issues is trending nowadays, wherein the Corporates doesn’t share Equity with their Employees but an equivalent benefit in monetary form corresponding to the increase in the value of Company’s Stock over a period of time, is shared with the Employees. This is the concept of Cashless Mechanism of Employee Benefit Plans, more popularly termed as Stock Appreciation Rights / Phantom Stock Plans.

A breather for listed entities-both with existing Phantom Stock Plans/ SARs and also for those who are planning to come up with such kind of Employee Benefit Plans, has come in place on 28th July, 2015, when the Capital Market Regulator i.e. SEBI issued Informal Guidances on the Share Based Employee Benefit Regulations in the matters of M/s Saregama India Limited and M/s Mindtree Limited. The subject matter in both the cases was akin to a large extent. Both the applicants approached SEBI to seek its guidance on the fact that whether the new SBEB Regulations issued by the Board are applicable on Stock Appreciation Rights Scheme/ Phantom Stock Scheme framed by the Company pursuant to which the Promoters are entitled to receive Cash Appreciation linked with the growth of the Company.

The Board took the respective matters into consideration and issued Informal Guidances which said that the applicability of the Regulations is to be judged in terms of Regulation 1(4), which states that: The provisions of these regulations shall apply to any company whose shares are listed on a recognised stock exchange in India, and has a scheme “involving dealing in or subscribing to or purchasing securities of the company, directly or indirectly”.

Since the Regulator has opined that the issue of SARs & Phantoms which are to be settled in cash does not attract the applicability of SEBI norms, would add a new dimension to the ESOPs arena and now Corporates/ HR Executives can implement Phantoms/ SARs which do not involve dealing in the securities of the Company, without being required to comply with the requirements of SBEB Regulations.

CP’s VIEWPOINT

We are of the view that the Informal Guidances issued by SEBI, will surely smoothen the way for the Corporates to come out with these more trendy forms of employee compensation.

Disclaimer:

Please note that the views expressed by SEBI are only with respect to the respective clarifications sought by the two applicants with respect to SEBI (Share Based Employee Benefit) Regulations, 2014 and do not affect the applicability of any other law or requirements of any other SEBI Regulations/ Guidelines or of the laws administered by any other authority. Further, this note has been made on the basis of publically available facts and other information. It is based on the analysis of the facts and our understanding and interpretation of applicable laws. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this note.

 

PHANTOMS & SARs GET A CLEAN CHIT…

Make Sure Your Board’s Report Contains The New ESOP Disclosures Prescribed By SEBI

The Securities & Exchange Board of India came up with a new set of Regulations in 2014 to govern the functioning of Share Based Employee Benefit Schemes. As a result, it repealed the two decade old Guidelines on Employee Stock Option Plans.

In the past few years, Employee Benefit Plans and particularly ESOPs have gained the limelight. This is due to the fact that Employee recognition, welfare & retention have become the prime concern for the Corporates. Taking this into the account, the lawmakers have also made a mark on the regulatory arena with regard to the governance of Share Based Employee Stock Option Plans. Accordingly the Capital Market Regulator has streamlined the legal and regulatory framework and further given the detailed clarifications upon the disclosure requirements under the new Regulations.

DISCLOSURES BY THE BOARD OF DIRECTORS

The details of an Employee Benefit Plan if framed by a Company now forms a mandatory part of its Directors Report. Earlier there was a precise list of disclosures that were required to be made under the Boards Report. But now SEBI has prescribed a detailed list of disclosures pursuant to the new Share Based Employee Benefit Regulations, 2014.

Now the Board of Directors, in their report shall disclose any material change in the scheme(s) and whether the scheme(s) is/ are in compliance with the Regulations.

As per the Regulations, following details are needed to be incorporated in the Boards Report:

    • Disclosures in terms of Guidance Note on Accounting for Employee Share-based PaymentsThe Guidance Note- 18 issued by ICAI on Employee Share-based Payments prescribes the accounting treatment of any kind of Employee Stock Option Plan, in the books of accounts of the Company. It also prescribes certain disclosure requirements by the Company. Now these disclosures shall also form part of the Boards Report.
    • Disclosures in terms of Accounting Standard- 20The regulations require the Companies to disclose Diluted Earnings per Share on the issue of shares pursuant all kinds of Share Based Employee Benefit Plans. This shall be disclosed in accordance with the manner prescribed under Accounting Standard 20- Earnings per Share issued by ICAI.
    • Details related to ESOSA brief description of the terms of ESOS, its accounting, valuation aspects, weighted-average exercise prices & weighted-average fair values shall be disclosed. Further the employee wise details of the options granted to Senior Managerial Personnel etc, are required to be given. The report shall also disclose the description of the method and significant assumptions used during the year to estimate the fair value of options.
    • Details related to ESPSIn case of a Company having an Employee Stock Purchase Scheme, the details regarding approvals, shares issued, price, lock-in, consideration received etc. are to be stated in the Directors Report.
    • Details related to SARs/ GEBS/ RBSDetails pertaining to any Stock Appreciation Rights Scheme, General Benefit Scheme, Retirement Benefit Scheme, as may be applicable upon a Company, are also required to be disclosed in the Boards Report.
    • Details related to TrustIn case of Companies that are administering their SBEB Schemes through Trust Route, there are additional requirements. SEBI has set out a requirement under the new Regulations to disclose the transactions made by the Trust set up for the purpose of administering the schemes including details of the Trust and the Trustees, amount and terms of the loan, transactions in shares by the Trust, details of secondary acquisition of shares by the Trust etc.

Further, apart from the Director’s Report, there are certain more Disclosure requirements under the new Regulations:

 Disclosure On Company’s Website

Along with the prescribed disclosures in the Directors Report, the details      of the Employee Benefit Plans shall also be disclosed on the Companys      Website and a web-link thereto shall be provided in the report of board of    directors.

Though the earlier Guidelines also had a requirement to disclose the details of Stock Option Plans of the Company in the directors report, however, the Regulator have now come up with more detailed and aligned list of disclosures to be given under the Boards Report regarding all kinds of Share Based Employee Benefit Plans under these Regulations. This shall create a more concrete standard for compliances to be made by the Corporate under the New Regulations. Companies are required to adhere to these requirements while drafting their Directors Report.

Make Sure Your Board’s Report Contains The New ESOP Disclosures Prescribed By SEBI