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.
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.
Ms. Mohini Varshenya

Ms. Mohini Varshenya

Partner & Head-ESOP Services


+91 9971673332

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