This article is written by Ravi Karan, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com. Here he discusses “Listing of a company – Benefits for employees”.

Introduction

Founder of Virgin Group – Sir Richard Branson once wisely said – “Take Care Of Your Employees And they will Take Care Of Your Business”. Companies want to create a truly competitive and compelling employee benefits package as it is an inevitable requirement these days to retain top talent.  Leaders who care about their workers are able to create a motivational work-place environment. As an employer, you are required to offer certain benefits like social security taxes, unemployment insurance,  medical insurance and worker’s compensation etc. based on the size of your company. The goal is to remain competitive in the marketplace. There are plenty of low-cost benefit options at the company’s disposal to help sweeten the deal. But where to start?

Benefits for employees upon the listing of a company are regulated by SEBI (share-based employee benefits) regulations, 2014. Broadly these regulations apply to Employee stock option schemes (ESOS), Employee stock purchase schemes (ESPS), Stock appreciation rights (SAR) schemes, general employee benefits schemes (GEBS) and retirement benefit schemes (RBS).  

Employee benefit schemes

1. Employee stock option scheme (ESOS)

ESOS means a scheme under which a company grants a stock option to its employee either directly or through a trust.

In 1980, Muhammad Anwar Ahmed bought shares of Wipro for INR 10,000 which is currently worth more than INR 500 Crore. This is not an outlier case of an investor minting money by investing in an early-stage company that transformed into a behemoth in future. There are many examples of employees who have made huge gains by subscribing to employee stock option schemes of privately held companies or unlisted public companies that went on to become public companies by listing on bourses.

ESOS gives an employee ownership interest in the company. Early-stage companies that are generally cash-starved not only can attract top talent but also can offer them less compensation by giving them a pie of ownership in the company. In a layman term, an employer allocates stock options to their employees based on a set criterion as explained in ESOS. Thereafter once vesting period is over, employees can exercise the shares of the company at a pre-determined price. Henceforth they are able to own equity in the company. Once the company decides to issue its IPO, it will provide a window of opportunity for these employees to make a windfall gain by selling their stocks in the share market. 

However, there is number of caveats that may undermine the successful ESOP millionaire stories of employees. Some of these can be the dismal performance of stock upon listing or resignation/termination of the employee before the expiry of the vesting period. 

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Subject to the provisions of SEBI (share-based employee benefits regulations) 2014, ESOS shall contain the details of the manner in which the scheme will be implemented and operated. No ESOS shall be offered unless the disclosures, as specified by Board in this regard are made by the company to the prospective option grantees. The company granting an option to its employees pursuant to ESOS will have the freedom to determine the exercise price subject to conforming to the accounting policies specified in regulation 15 of SEBI (share-based employee benefits) regulations,2014. There shall be a minimum vesting period of one year in case of ESOS. The company may specify the lock-in period for the shares issued pursuant to the exercise of the option.

Direct route to grant ESOP’s VS trust route to grant ESOP’s

DIRECT ROUTE	TRUST ROUTE
Options are granted to the employees which are converted into fresh equity in the company at the time of exercise.	A trust created by the company acquires shares from the secondary market that are subsequently allotted to employees.
This mode is preferred by unlisted companies.	This mode is preferred by listed companies.
Fresh issuance of shares to the employees will lead to a dilution in the capital base of the company	Since shares are allotted from the secondary market, there is no further dilution in the capital base of the company.
When employees want to monetize their shares, they should either wait for the company’s IPO or company should buy-back the shares from the employees.	The employees can sell their shares either in the secondary market or to the trust.

Key managerial personnel, directors and their relatives cannot be trustees of the trust. Also, shareholders holding more than 10% of the paid-up capital of the company cannot be appointed as trustees. Trust should comply with SEBI (Prohibition of Insider Trading) Regulations, 1992. The trust should maintain proper accounts and documents for all the transactions related to these schemes. Also separately a trust deed containing necessary provisions specified by SEBI should be filed with stock exchanges where the shares of the company are listed.

2. Employee stock purchase scheme (ESPS)

ESPS lets employees purchase stocks of the company at a discounted price. There is two kinds of ESPS – Qualified and Non-Qualified schemes. Shareholder approvals are required for effective implementation of qualified scheme whereas there is no such requirement for the non-qualified scheme. Price for shares is decided by the company, and the shares issued are locked for minimum one year after allotment. However, when shares are issued at the same price as in public issue, there will be no lock-in period for them.

3. Stock appreciation rights scheme (SARS)

An employee can be benefitted by SARS when the price of the stock rises.  There is no need to buy any stock. Thus, it is an incentive given to employee without investing anything upfront. Therefore, there is no need to pay an exercise price by an employee. The incentive can be either in the form of cash or shares. There will not be any dividend or voting rights for SAR granted to an employee. 

4. General employee benefits scheme (GEBS)

GEBS intends to utilize shares of the company for employee welfare, healthcare benefits, accidental or death insurances. In accordance with SEBI regulations, a company implementing GEBS through trust route via secondary acquisition is required to take separate approval from the shareholders of the company. The holding of the trust should not exceed 2% of the paid-up capital of the company as on the date of the financial year immediately prior to the year in which shareholder approval is obtained. The shares held by the trust should not be more than 10% of the book value or market value or fair value of the total assets of the scheme. 

5. Retirement benefit scheme (RBS)

RBS intends to utilize shares of the company for retirement benefits of employees. The shares held by the trust which is looking after the retirement benefits scheme should not be more than 10% of book value or market value or fair value of total assets of the scheme.

Eligibility 

Compensation committee established by the company decides eligibility criteria for employees to subscribe to these schemes. To align it with Companies Act 2013, independent directors have been excluded from the category of eligible employees to whom share-based employee benefits can be granted. In case of listed entities, any amount of benefit granted to an independent director before the enactment of new norms under the companies act, 2013 is valid and can be vested/exercised as per terms of the grant. Further, a permanent employee or Director of an Associate Company has been covered in addition to those of the Company, it’s Subsidiary and Holding Company as an employee to participate in schemes. The Compensation Committee shall be constituted as provided under the Companies Act, 2013. The Compensation Committee shall formulate detailed policy and administer the policies and procedures for the implementation of schemes. SEBI board can grant relaxation from strict compliance with any of these regulations upon receiving application by a company in this regard. Such application should be submitted by a company with a non-refundable fee of rupees of INR one lakh by NEFT/RTGS/IMPS/bankers cheque/demand draft payable at Mumbai in favour of the SEBI board. In case of contravention of these regulations, SEBI board can trigger the clauses SEBI India act, 1992 (15 of 1992), the securities contracts (regulation) act, 1956 (42 of 1956) or the companies act, 2013 (18 of 2013).

The compensation committee should prepare rules of the schemes, select eligible employees, enact policies for effective compliance and governance, implement schemes by themselves in case of the direct route or empower the trust members in case of trust route and repay a loan to employees in case of winding up. 

Conclusion

SEBI (Share-based employee benefits) regulations 2014 have replaced SEBI (employee stock option scheme and employee stock purchase scheme).  Apart from the benefits discussed above, these regulations have also made it possible for these schemes to be eligible in open offers, buybacks and delisting offers without complying with a minimum holding period of six months. These regulations allow listed companies to purchase shares from the open market through a trust for the benefit of their employees which were earlier restricted. The intent is to prevent unfair practices involved in the secondary acquisition of shares and to align the benefits in accordance with internationally recognized best practices such as stock appreciation rights, general employee benefit schemes and retirement benefit schemes. It is certainly a step in the right direction.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.