November 18, 2015by Ms. Mohini Varshenya0

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:


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.


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.

Ms. Mohini Varshenya

Ms. Mohini Varshenya

Partner & Head-ESOP Services


+91 9971673332

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