`ESOPs’ (Employee Stock Option Scheme) now are covered by the SEBI (Prohibition of Insider Trading) Regulations, 2015. Remuneration by allotment of shares  can be paid to directors, officers, employees of companies in the form of ESOPs. S 2(37) of the Companies Act, 2013 defines `Employees Stock Option Scheme’ as the option given to whole-time directors, officers, employees of a company, which gives such directors, officers, employees  benefit or right of purchase or to subscribe at a future date,  the securities offered by the company at a pre-determined price. 

The new regulations on insider trading bar employees from exercising their option in the shares to which they are entitled under the scheme framed by the company. In other words, they cannot apply and receive their share entitlement any time as was permitted by the earlier regulation in which ESOPs were kept out of the purview of the Regulations. An employee in possession of unpublished price-sensitive information will now not be allowed to exercise their rights to acquire shares under ESOPs during the 45 days period when the trading widow of shares is shut. The period of 45 days starts from the end of a quarter i.e. 30th June, 30th September, 31st December and 30th June, till the end of the 48 hours after the announcement of the quarterly results by the company required to be published pursuant to Cl 41 of the Listing Agreement. 48 Hrs is the time limit within which the quarterly results are required to be published in print media in national dailies in English and vernacular of the place where the registered office of the company is situate.  The employees will not be allowed to exercise their right if they have sold their shares six months prior to that date.  After six months they can exercise their option. Further employees once they receive shares on exercising their option are barred from selling their shares.

The Regulations have tried to safeguard every area where leakage of the Regulations can occur. However, experts feel that ESOPs will receive a jolt. Attention of SEBI has been drawn to review the provision.

The SEBI(Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines,1999 announced by SEBI is a scheme by which option is granted to employees and option means right not being an obligation to employees in pursuance of ESOS requiring application for shares at a pre-determined price.

Issue of  ESOPs require special resolutions to be passed at a general meeting which meaning shareholders are the approving authority of the scheme. For offer of more than one per cent shares of a company, there is the necessity of specific disclosure and approval at the annual general meeting. So ESOPs can be approve at an extra-ordinary general meeting ( S 100 of the Companies Act,2013) but in case of right to subscribe to more than one per cent requires approval of the shareholder at an annual general meeting ( S 96 of the Companies Act,2013)

The rules have prescribed minimum period of one year between grant of options and its vesting. On the expiry of one year, period during which option can be exercised would be determined by the company. So after the lapse of one year the option to subscribe to the shares shifts from the employee to the company.

Compensation Committee composed of majority independent directors monitor ESOPs . Shareholders have the right to approve application of the scheme to holding ( S 2(87) ) and subsidiary companies ( S 2(46) ).

Directors’ Report (S 134) of the company shall include :

i)  Total number of shares covered by ESOP approved by shareholders.

ii)  Pricing formula.

iii)  Options – granted, vested, exercised, forfeited, extinguished, modification, money realized by exercise of options, total number of options in force, employee-wise details of options granted to senior managerial personnel and to any other employee who receive a grant in any one year of options amounting to five per cent or more of options granted during that year.

iv) Fully diluted earning per share (EPS) computed in accordance with International Accounting Standards.

In November,1997, SEBI constituted a Group to review the  regulations in respect of Employee Stock Options Plans(ESOP) and changes were recommended. In June 1999 the Group recommended guidelines called SEBI(Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 which came into effect from 19/6/1999.

SEBI(Prohibition of Insider Trading) Regulations,2015 brought ESOPs under its net. ESOPs may soon lose its shine and affect industry. NSE has approached SEBI. Out is awaited. For the present ESOP continues to be under the scanner of the new regulation on insider trading.

Author : CS Saibal Chandra Pal, Advocate

[ Opinion expressed is that of the Author]

Copyright & Publishing Rights with Author.

Securities Law & Financial Sector Regulatory Practice

Edited by :   Soubhik Chakraborty, Advocate

Email: saibal2004@rediffmail.com

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0 responses to “ESOPs & Insider Trading – Provision as per SEBI (POIT) Regulations, 2015”

  1. suhita mukhopadhyay says:

    very vividly dealtsubject

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