Nandini Tripathy | Symbiosis Law School | 17th October 2019
Background
Over the years, groups have used employee inventory option schemes (ESOP Schemes) as a powerful method to align employee pastimes with shareholders, reward their efforts, boom their loyalty in the direction of the agency and encourage personnel to carry out better. An initial public providing (IPO) and consequent listing of equity shares is one of the critical approaches in which personnel are trying to find value appreciation in inventory options and fairness stocks held by means of them. Accordingly, unlisted corporations generally align timing of exercise of options below ESOP Schemes with their plans to adopt an IPO. The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended (SEBI ICDR Regulations), which regulates IPOs, presents exceptions for ESOPs from positive eligibility conditions to be fulfilled by way of the company challenge the IPO as well as transfer restrictions on fairness shares relevant after the of completion of the IPO.
However, issuers have confronted challenges in the past with admire to eligibility conditions if the alternatives have remained first rate with people who have ceased to be an worker of the issuer. Further, issuers are being increasingly questioned with the aid of such former employees, who hold to keep stocks within the provider but are not presented lock-in exemptions to be had to current employees. Additional foundation to those concerns is that former personnel are dealt with beneficially underneath the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 (ESOP Regulations) and the Companies Act, 2013 and similar advantages have not been recognized under the SEBI ICDR Regulations.
The IPO Regime – Exemption for ESOP holders is no exception for former employees?
Eligibility situations and remedy of former employees. The SEBI ICDR Regulations prescribe positive eligibility conditions, which each issuer is required to comply with, previous to undertaking an IPO. Regulation 26(five) of the SEBI ICDR Regulations prohibits an provider from project an IPO if there are any awesome convertible securities or any proper entitling any man or woman with an option to acquire fairness stocks in the issuer. This eligibility condition must be complied with at each degree of the IPO, whether on the submitting of the draft pink herring prospectus (DRHP), purple herring prospectus, prospectus or project allotment inside the IPO. The reason of the Securities and Exchange Board of India (SEBI) in the back of this kind of extensively worded restrict appears to be to make sure that no third birthday party keeps with a right to receive equity shares of the provider post the IPO, if such proper has not been authorised by way of the new shareholders (who have acquired stocks pursuant to the IPO) as well as to keep a degree-playing subject among present shareholders and publish-IPO shareholders. However, Regulation 26(5)(b) of the SEBI ICDR Regulations also provides positive exceptions to the aforesaid limit, together with any choice “granted to employees” pursuant to an employee inventory option scheme can remain exquisite at the time of task the IPO. In terms of Regulation 2(1)(m) of the SEBI ICDR Regulations, the definition of “employee” inter alia, consists of a everlasting and full-time employee of the provider, or of the holding agency or subsidiary organization or of that fabric associate(s) of the issuer. Whilst the definition of personnel has been understandably stored wide, the contour of this definition seems to be restrained to current employees most effective and does no longer include employees of the issuer who acquired alternatives at some stage in the course in their employment, however who, by the point of the IPO, have either retired or transferred to other businesses inside the company group (apart from the conserving company, subsidiary enterprise or cloth buddies, which is in particular applicable inside the case of large conglomerates), or have died or resigned from employment.
The essential difference between the worker who gets alternatives and a shareholder is that the worker gets options as a reward for his performance and contribution already made by means of such worker to the issuer. Further, in comparison to other kinds of alternatives inclusive of placed/call alternatives or options given to creditors or different 1/3 parties, ESOPs are commonly disbursed to a huge set of employees and, consequently, controlling or proscribing the wide variety and volume of such options, specifically within the case of issuers with huge and massive operations, may additionally impose a enormous venture for issuers. If any worker of the company with super options has ceased to be an worker on the time of task the IPO for any motive, then the issuer is predicted to continuously monitor such options and ensure that such unexercised alternatives are either exercised right now or lapsed in any other case, such options may additionally without delay affect eligibility of the issuer to adopt the IPO.
Lapsing of alternatives / mandatory exercise of options
The lapsing of such vested alternatives or requiring the previous personnel to mandatorily exercising them in a short period (specifically while workout includes charge) may not be in the hobby of former employees specially in cases in which they have ceased to be employees because of reasons together with retirement or loss of life. Further, making sure obligatory workout of vested alternatives by using all former employees in a short length may not be feasible or viable for issuers (specially for issuers with a huge worker base). It may also be argued that the requirement underneath the SEBI ICDR Regulations is in battle with the SEBI ESOP Regulations and the Companies Act, because the SEBI ESOP Regulations and the Companies Act permit former employees to preserve vested alternatives granted to them at some point of the path of employment till the exercising is called for through groups beneath the applicable ESOP Scheme.
Exemption from Strict Interpretation of Regulation 26(5)(b)
Owing to such sensible difficulties, inside the past, issuers have approached SEBI seeking exemption from a strict interpretation of Regulation 26(5)(b) of the SEBI ICDR Regulations to consist of former personnel of the issuers. Issuers have sought exemptions to allow former employees of issuers to keep the stock alternatives prior and submit list of the equity shares. Certain grounds for seeking such exemption consist of (i) that the inventory options were issued to the former employees, while they were in the employment of the company, its retaining or subsidiary organizations; (ii) it would no longer be within the hobby of such former personnel to lapse the stock options granted and/or vested in such former employees; (iii) it would no longer be almost viable to the issuer to stall the IPO until it reaches out to all such former employees, in particular while exercise of alternatives is dependent on of entirety of the IPO; and (iv) the issuer intends to reward the previous personnel as an appreciation for being associated with the provider and for his or her efforts. Whilst SEBI has been touchy to such occasions and has supplied exemption, a dialogue with respect to this provision of the ICDR Regulations is vital.
Lock-in of Equity Shares on Allotment in an IPO
Regulation 37 of the SEBI ICDR Regulations provides that the entire pre-issue capital held via men and women shall be locked-in for a period of three hundred and sixty-five days from the date of allotment within the IPO. Whilst Regulation 37 offers an exception from the provisions of lock-in of the equity stocks to the employees of the provider who have been allocated the equity shares underneath the worker stock choice plan of the issuer, this exemption is also applicable handiest for present personnel and does not extend to former personnel. SEBI has clarified this function in its informal steerage issued to First source Solutions Limited and Multi Commodity Exchange of India Limited. Whilst it is comprehensible that the lock-in exemption isn’t to be had for personnel who have voluntarily resigned, or been removed, from employment , it can be considered unfair for the lock-in exemption to no longer be to be had to personnel who obtained alternatives and in the end, retired or died or are completely incapacitated. Such people deservedly obtained such options and feature complied with all requirements of their respective schemes.
Conclusion
In view of the above discussion and for the reason that issuers and previous personnel face diverse demanding situations all through the manner of IPOs with the aid of issuers, it may be suggested that the SEBI ICDR Regulations and the ESOP Regulations must be reconciled to include resigned, retired, transferred personnel and nominees of deceased employees inside the ambit of “personnel”. Further, the exemption from lock-in of equity stocks must additionally extend to former personnel who’ve received fairness shares below the ESOP Scheme all through the direction of employment and whose employment has ceased because of retirement, dying or permanent disability. These changes will have the following capability blessings: Former employees will gain and no longer be pressured to exercise before various levels of the IPO and additionally be capable of promote the equity shares post listing without lock–in. Enable issuers to vest and permit exercising of inventory options closer to listing (as compared to DRHP) which may additionally help in warding off introduction of a huge grey market for fairness stocks of the provider. The benefit of listing gains can also be enjoyed by means of former employees who obtained alternatives because of their employment. Most importantly, issuers will not breach eligibility conditions for assignment an IPO.
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