 "'Limits window for exercise of ESOPs'")
In layman's term, ESOP is an alternate method of remuneration, generally offered to the key employees and top management of a company. Under ESOP, company's employees have the ability to acquire shares of the company at a pre-defined price, within a stipulated period in future. This helps the employee profit from the company's growth.
Sebi's new and revamped regulation to curb 'insider trading' has steered a lot of discomfort and anxiety in the industry as far as ESOP is concerned. Under the old regime, exercise of ESOP and sale of shares so acquired were exempted from the 'contra trade' rule. However, a similar exemption doesn't find any place under the new regulations. The intent of the regulator is to curb insider trading by restricting the exercise of ESOP, if such employee is in possession of any unpublished price sensitive information.
If the employee is in possession of any unpublished price sensitive information, and the ESOP becomes due, the employee has the flexibility to purchase/subscribe the shares of the company, but is restricted to subsequently 'trade' in those shares. The new regulations restrict such employees from selling shares of the company within a period of six months of receiving them.
Sebi may carve out exercise of options under ESOP from the purview of the new regulations. It remains to be seen whether the regulator will take a pre-clearance approach for exercise of options under ESOP, or will consider some sort of a timing restriction for contra trade regarding shares acquired under ESOP, or a combination of these two. As the law stands today, there is a limited window for the exercise of ESOPs
Abhishek Sinha
Partner, Shardul Amarchand Mangaldas & Co
Sebi's new and revamped regulation to curb 'insider trading' has steered a lot of discomfort and anxiety in the industry as far as ESOP is concerned. Under the old regime, exercise of ESOP and sale of shares so acquired were exempted from the 'contra trade' rule. However, a similar exemption doesn't find any place under the new regulations. The intent of the regulator is to curb insider trading by restricting the exercise of ESOP, if such employee is in possession of any unpublished price sensitive information.
If the employee is in possession of any unpublished price sensitive information, and the ESOP becomes due, the employee has the flexibility to purchase/subscribe the shares of the company, but is restricted to subsequently 'trade' in those shares. The new regulations restrict such employees from selling shares of the company within a period of six months of receiving them.
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There will always be certain key employees who are perpetually in possession of such price-sensitive information. How will this be aligned, if ESOP is vested and they cannot exercise the option, merely because they are in possession of such information? Also, given the contra trade restriction, they cannot procure ESOP shares from the company if they had sold the shares within six months prior to that exercise date.
Sebi may carve out exercise of options under ESOP from the purview of the new regulations. It remains to be seen whether the regulator will take a pre-clearance approach for exercise of options under ESOP, or will consider some sort of a timing restriction for contra trade regarding shares acquired under ESOP, or a combination of these two. As the law stands today, there is a limited window for the exercise of ESOPs
Abhishek Sinha
Partner, Shardul Amarchand Mangaldas & Co