New rules of ESOPs will help in good governance

A major change in the new rules is a change in the definition of “employee” who falls under the ESOP (Employee Stock Option Plan) framework. Employee now includes a non-permanent employee of a company, as long as he or she works “exclusively for such company”. This means companies can now issue ESOPs to employees on fixed-term contracts or on probation prior to their confirmation of employment. There is also more clarity on the coverage of “non-executive directors” in the definition of employee, which means that such officers may also be given ESOPs. It is important to note that independent directors continue to be excluded given the specificity of their role. .

However, in case of listed companies, one must remember that employees who are promoters or are part of their promoter groups are still not allowed ESOPs.

The new rules expanded their coverage to include employees of affiliates (in whom the issuing company has significant influence or is engaged in a joint venture). In the earlier rules, only employees of holding and subsidiaries were allowed to issue ESOPs.

The new rules have taken cognizance of the health problems and difficulties faced by employees and their families especially during the pandemic and have included some relief measures. They have exempted ESOPs from the minimum vesting period requirement of one year in case of death or permanent disability of the employee. This ensures that employees (or their families in case of death) receive desired benefits even if the statutory minimum vesting period of one year has not elapsed, thus allowing them to face situations in times of financial hardship or bereavement. helps to do. Perhaps.

In addition, the new rules provide for vesting of stock options granted to employees in accordance with the relevant vesting schedule, even after the employee’s retirement or retirement, in accordance with company policies and applicable law. This means that the employee’s retirement does not put a full stop on ESOP benefits that an employee may have earned in the course of his employment. Such ESOPs can help meet the post-retirement cost of living for employees in the private sector who may not be part of the formal pension system.

Apart from various pro-employee amendments, the new rules provide various relief measures for companies. Traditionally, companies had to, at the time of the implementation of ESOP, decide on the way ESOP would be administered through the ESOP Trust. The new rules give companies the flexibility to be able to change the mode of administration (direct route to trust route, or vice versa) at any time as per the circumstances.

Further, the period for appropriating the unsuitable list of the trust is extended by one more year, subject to the approval of the Compensation or Nomination and Remuneration Committee, for such extension to the second financial year; The trust therefore has an additional year to appropriate the shares acquired through secondary market acquisitions.

The new rules bring some but notable changes to the way ESOPs are implemented and governed. In the case that an ESOP is amended, the new rules clarify that although the ESOP change is not detrimental or prejudicial to the interests of employees, a special resolution may be required from shareholders, the only exception being that That such variation is only to meet regulatory requirements.

The new rules have already been notified on August 13 and hence, listed companies and firms that are planning to list their shares should review the terms and conditions of their ESOPs to ensure that they comply with the new rules. do follow. Where the company manages ESOP through a trust, the terms and conditions of the trust deed should be reviewed for compliance and effective governance under the new rules.

The new rules notified by SEBI are a welcome move at a time when the markets are overwhelmed with positivity due to several new generation companies listing their shares. The rules regarding dealing with equity shares provide additional flexibility, transparency and good governance in relation to share-based employee benefit plans.

Shalini Jain is Tax Partner – People Advisory Services, EY India. Views expressed are personal.