SEBI clarified rules on employee stock option plans (ESOPs)

MUMBAI: The Securities and Exchange Board of India has clarified rules on employee stock option plans (ESOPs) after the new insider trading rules restricted the timing of sale of such shares.

The regulator said employees could exercise their stock options and it would not be considered as trading and it would not attract contra trade restrictions.

"Where a designated person acquires shares under an ESOP and subsequently sells/pledges those shares, such sale shall not be considered as contra trade, with respect to exercise of ESOPs," Sebi in a guidance note posted on its website said.

As per Sebi rules employees cannot do an opposite transaction for a minimum period of six months from the date of the previous purchase or sale.

"Where a designated person sells shares (say on August 01, 2015), acquires shares later under an ESOP (say on September 01, 2015) the acquisition under ESOP shall not be a contra trade. Further, he can sell/pledge shares so acquired at anytime thereafter without attracting contra trade restrictions. He, however, will not be able to purchase further shares during the period of six months from August 01, 2015 when he had sold shares,"Sebi said.

It said any derivative contract that is cash settled on expiry would be considered to be a contra trade.However,there would be no restriction of contra trade on employees in respect of buy back offers,open offers,rights issues and follow-on public offers by listed companies.

Sebi rules currently prohibits creation of pledge or invocation of pledge for enforcement of security while in possession of unpublished price sensitive information.

The regulator said however the pledgor or pledgee would have to demonstrate that the creation of pledge or invocation of pledge was bona fide and prove their innocence.

Securities lawyers said by this clarification Sebi has in effect introduced a new defense to the charge of insider trading.

"Pledging of shares is allowed even if it was not disclosed as part of the Trading Plan. Since the Trading Plan is a new concept, clarity on this issue will help in promoting its usage," Vaneesa Agrawal, former legal officer,SEBI.