On July 20, 2020, the Securities and Exchange Board of India (“SEBI”) published an informal guidance on the interpretation of regulation 9(2) of the SEBI (Share Based Employee Benefits) Regulations, 2014 (“SBEB Regulations”) sought by Way to Wealth Brokers Private Limited (“Applicant”).
Facts:
The Applicant is a stock broker, registered as an intermediary with the SEBI. A listed company had approached the Applicant for cashless funding of restricted stock units (“RSUs”) being offered to their employees as a part of their employee compensation plan. It was proposed, that on the receipt of the duly signed exercise letter and undertaking for credit of allotted RSU shares by the employee who proposed to avail the cashless funding, the funding amount would be credited by the Applicant to the employee’s bank account. Subsequently, the amount would be transferred to the company’s account to process the allotment of RSU shares. The company would credit the allotted RSU shares directly to the employee’s DP account. Thereafter, the RSU shares would be sold and sale proceeds would be adjusted towards cashless funding made by the Applicant.
Issues:
Guidance was sought on the following:
Whether the Applicant as a registered stock broker was permitted to fund the securities to be issued under the SBEB Regulations (viz employee stock options and/or RSU) by a listed company to its employees who propose to avail cashless options. In the event such funding is permitted, then what the maximum amount is per unit/security that can be funded?
Regulation 9(2) of the SBEB Regulations provides as follows:
“No person other than the employee to whom the option, SAR or other benefit is granted shall be entitled to the benefit arising out of such option, SAR, benefit etc.
Provided that in case of ESOS or SAR, under cashless exercise, the company may itself fund or permit the empanelled stock brokers to fund the payment of exercise price which shall be adjusted against the sale proceeds of some or all the shares, subject to the provisions of the applicable law or regulations.”
Interpretation by SEBI:
On an analysis of regulation 9(2) of the SBEB Regulations, SEBI in its informal guidance stated that the company could permit the empaneled stock brokers to fund the payment of exercise price which would be adjusted against the sale proceeds of some or all of the shares, subject to the provisions of applicable law or regulations. Thus, if the company permits, the Applicant could fund the payment of the exercise price which would be adjusted against the sale proceeds of some or all the shares, subject to the provisions of the applicable law or regulations. SEBI also held that the SBEB Regulations do not prescribe for any maximum limit on amount per unit/security that could be funded.
Please find a copy of the informal guidance here.
This update has been contributed by Adity Chaudhury (Partner), Deeya Ray, Kshitija Naik and Ishita Malhotra (Associates).
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