With an aim to prohibit unfair practices in secondary acquisition of shares along with identifying and realizing the international theories of Stock Appreciation Rights, General Employee Benefit Schemes and Retirement Benefit Schemes, SEBI in the year 2014 notified Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 (“SEBI Regulations”).
General Employee Benefit Schemes (“GEBS”) have been running in Corporates for decades but the concept got its recognition only after SEBI Regulations came into effect. Primarily GEBS are framed for the purpose of employee welfare including healthcare benefits, hospital care or benefits, or benefits in the event of sickness, accident, disability, death or scholarship funds, or such other benefit as specified by such company. Under these kind of schemes the Company forms a Trust which holds the shares of the Company as an investment and use the proceeds or earnings from investment for attainment of particular stated objectives.
INFORMAL GUIDANCE (Dated June 29, 2018) – JK PAPER LIMITED
In line of the same, an Informal Guidance was asked from SEBI by JK Paper Limited, a Company listed on BSE Limited and National Stock Exchange of India Limited. stating whether an Employee welfare Trust providing cash benefits to the employees would fall under the ambit of SEBI Regulations or not.
The Company stated that the Trust (formed by the Company) acquired the Equity shares of the Company through different modes (primary and secondary) and is only passing on monetary benefits (from the earnings of the Trust earned from dividend income, Interest, yield or any other income of the Trust) to the employees under four different employee benefit schemes. Prima – facie it was believed by the Company, that as the shares are not being transferred to employees the Trust do not falls under the domain of SEBI Regulations.
Taking an opposite seat, the watchdog of securities market stated that shares initially acquired by the Trust amounts to dealing even if only cash benefits are being given to employees, accordingly the Employee welfare Trust of the Company would fall under the ambit of SEBI Regulations.
From above it has now become evident that Trust, initially formed by the Company, who has acquired shares of the Company will have to comply with all the timelines as specified in SEBI regulations irrespective of whether the benefits provided to the employees are in cash or equity form.
In accordance with the SEBI Regulations, a Company implementing GEBS through Trust route via secondary acquisition is required to comply with the following:
- Take Separate approval from the shareholders of the Company to undertake secondary acquisition of shares
- The holding of the Trust shall at no time exceed 2% of the paid up equity capital as at the end of the financial year immediately prior to the year in which the shareholder approval is obtained for such secondary acquisition.
- The shares held by the Trust shall at no point in time, exceed 10% of the book value or market value or fair value of the total assets of the scheme, whichever is lower, as appearing in its latest balance sheet for the purposes of GEBS.
Further to ensure a smooth transition for complying with the above said provisions, Companies were provided a sufficient time period of five years (ending on October 27, 2019) to bring down the Trust holding to the required level.
The manner of disposing off the shares were also provided which stated that the trust holding shares pursuant to GEBS shall not become a mechanism for trading in shares and hence shall not sell the shares in secondary market except:
in case of emergency for implementing the schemes covered under Part D and Part E of Chapter III of these regulations, and for this purpose –
(i). the trustee shall record the reasons for such sale; and
(ii).money so realised on sale of shares shall be utilised within a definite time period as stipulated under the scheme or trust deed.
Hence JK Paper Limited would be required to bring down the shareholding of their Trust (if earlier acquired through Secondary acquisition is more than the prescribed limit)within next 12 months
With only 12 months to go Companies shall start off loading there shares so as to avoid the bubble of non-compliance.
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