Sebi steps on MCA turf with employee benefit schemes directives

The Securities and Exchange Board of India (Sebi) in its last Board meeting held on June 19, 2014, approved framing of regulations for employee benefit schemes involving shares of the company. These regulations would cover employee benefit schemes which deal in shares of the company, in addition to Employee Stock Option Schemes. As per the Sebi press release, such schemes would be permitted to acquire shares of the company from the secondary market under certain restrictive conditions including with regard to sale of shares acquired.

Sebi had earlier issued circulars on January 17, 2013 and May 13, 2013 on the same issue. These circulars prohibited listed companies from framing any employee benefit schemes involving acquisition of own securities from the secondary market. Under these circulars, Sebi had equated financing of employee welfare (benefit) trusts with granting of stock options to employees, not appreciating that the employee welfare (benefit) trusts may not necessarily have the object of granting stock options. Sebi had, through these circulars, forced companies to align their employee benefit schemes with ESOP guidelines by amending the Listing Agreement.

These circulars were issued stating that Sebi apprehended market abuse in dealing of company's shares by such Employee benefit schemes. It is another matter that Sebi has till date not discovered a single instance of any market abuse by any such employee benefit schemes.

The Companies Act allows any public and/or private company to provide any financial assistance for the purpose of or in connection with purchase of or subscription to any shares in the company to a person (Trustee) for the benefit of the employees of the company.

Under the legal framework for the securities market, Sebi cannot use the powers under the Sebi Act, to prohibit activities specifically permitted under the Companies Act. Sebi therefore cannot restrict employee welfare trusts which do not have employee stock option as their object against specific provisions of the Companies Act.

Recently, there has been a controversy when Sebi had amended the Buyback Regulations to prescribe a different time line than what is prescribed under the Companies Act. One of the top law officers of the country had opined that such a move would tantamount to Sebi making amendment to an Act of Parliament. Even in this case, Sebi seems to have overstepped its jurisdiction.

Under the Companies Act 2013, the government has notified Companies (Share Capital and Debentures) Rules, 2014. Rule 16 specifies conditions in connection with purchase of or subscription to any shares in the company to a person (Trustee) for the benefit of the employees of the company such as the condition that such purchase of shares shall be made only through a recognised stock exchange in case the shares of the company are listed.

The power to prescribe additional conditions has been given to the central government under the Act of Parliament. Sebi does not have any authority to itself impose conditions that are different from or stricter than those prescribed under Rules by framing regulations using the general power under section 11(1) of the Sebi Act.

While the deadline for aligning the existing employee benefit scheme is approaching fast (June 30, 2014), there is no indication from Sebi on whether companies will still be forced align their employee benefit schemes with ESOP Guidelines in light of the change in position by Sebi. The much-hyped decision of the Sebi Board to frame regulations on employee benefit schemes does not take away from the fact that it has already prescribed circulars on this topic that are patently illegal and have caused confusion in the minds of stakeholders including listed issuers, investors and trustees of such trusts. Sebi needs to resist the belief that Section 11 of the Sebi Act gives it power beyond what has been prescribed by Parliament through other Acts.

Sanchety, an advocate, is a former IRS officer who had also worked as general manager, Sebi