SEBI, the Indian Securities Regulator, has decided that Trusts created to dish out Employee Stock Option Plans (ESOPs) of companies will not be allowed to buy shares from the stock markets. (SEBI Board Meeting Minutes)
7. Listed entities shall frame employee benefit schemes only in accordance with SEBI (ESOS and ESPS) Guidelines, 1999. Entities whose schemes are not in conformity with the same would be given time to align with the said Guidelines. Further, such schemes will be restrained from acquiring their shares from the secondary market.
(Also see: Actual Notification was made on Jan 17, 2013)
ESOP trusts usually sell shares to employees, at the grant price, on the date of exercise (which usually happens after a vesting period). These shares are acquired by the ESOP trust, currently, in two ways:
a) ESOP Trusts are allocated new shares by the company. This increases the total number of shares in the company. The ESOP trust is merely a vehicle.
b) ESOP Trusts buy shares in the stock market. Since no fresh shares are issued, companies have to loan the ESOP trusts money to buy these shares. The shares sit in the pool even if not yet granted.
c) Promoters or other investors “grant” the ESOP Trust shares, at a lower price, for a consideration that will be paid only when employees exercise their options.
I noted in the Veritas-IndiaBulls Battle: The EWT post that certain companies abuse b) above to have huge allocations to such option pools in promoter controlled trusts, which then are loaned money by the company, and that money is used to prop up the value of shares in the stock market. These ESOP pool shares aren’t granted to employees, are are quasi owned by the promoters using company money.
SEBI will now put an end to this abuse by banning any share purchases from the market by ESOP trusts. This is good news, and is likely to impact how many companies operate their ESOP programs.