SEBI Listing Regulations

ESOPS as Managerial Remuneration - Do Regulators Need to Revisit Regulatory Architecture

Employee Stock Option Plans (ESOPs) are a well-recognised method of compensating employees and attracting and retaining the best talent. Compensation in the form of equity shares helps in creating a sense of ownership in the mind of employees. Benefit schemes for employees, including ESOPs, have gained popularity, especially in technology start-ups that have limited financial resources in the initial years, but want to attract the best talent. ESOPs are the option or a right, but not an obligation, which is offered by a company to its employees to purchase its shares at a pre-determined price in the future. ESOPs align the interest of the employees with long term interest of the companies and play a vital role in retaining employees at the growing stage of the company.

Section 2(37) of the Companies Act, 2013 (“Act”), defines ‘employees’ stock option’ as the option given to directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price. The Act expressly prohibits ESOPs for Independent Directors[1] as the law makers believe that it compromises the ‘independence’ of such Independent Directors. Section 62(1)(b) of the Act provides for the approval of shareholders by a special resolution. Rule 12 of the Companies (Share Capital & Debentures) Rules, 2014, lays down the legal framework for issuance of ESOPs for unlisted companies. Listed companies having ESOP plans are required to comply with the SEBI (Share Based Employee Benefits) Regulations, 2014 (“ESOP Regulations”).
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ABOLITION OF DIVIDEND DISTRIBUTION TAX

Introduction

The Hon’ble Finance Minister, Ms Nirmala Sitharaman, had presented the Union Budget for the financial year 2020-21 on February 1, 2020, and introduced the Finance Bill, 2020 (“Bill”) in the Lok Sabha. The Bill comprised of financial proposals, including taxation related proposals, to amend the provisions of the Income-tax Act, 1961 (“IT Act”) for financial year 2020-21. The final Bill, incorporating certain amendments, was passed by the parliament on March 26 and received the assent of the President of India on March 27, 2020, and has now been enacted as the Finance Act, 2020 (the “Finance Act”).

In this post, we are covering the provisions of the Finance Act related to dividends distributed by Indian companies. For the changes impacting the tax on dividend distributions to the unitholders of Real Estate Investment Trust and Infrastructure Investment Trusts please see our earlier post here.
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Continuous disclosure obligations - Indian securities market

A regulatory environment that supports robust secondary market disclosures is critical for a well-functioning securities market. Ongoing disclosures by listed companies are being increasingly scrutinised by regulators, stock exchanges and market participants to see if timely and accurate disclosures of all material information are being made by the listed entity. Accordingly, it is important for companies to ensure that developments in their businesses translate to appropriate regulatory disclosures.

A recent example of the importance of secondary market disclosure is the Facebook case. In 2019, the US Securities and Exchange Commission (“SEC”) announced charges against Facebook Inc. (“Facebook”) for making misleading disclosures in its periodic filings against the risks pertaining to misuse of its user data by third parties. The SEC alleged that in public disclosures, Facebook presented the risk of misuse of user data as “merely hypothetical”, when they were aware that a third-party developer had actually misused Facebook user data. The SEC press release states that Facebook has agreed to pay $100 million to settle the charges.

We discuss this development and learnings for the Indian market below.
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SEBI-Streamlines-Rights-Issue-Process

The SEBI has streamlined certain aspects of the rights issue process that is expected to not only reduce the timelines but also provide clarity on the renunciation and trading of rights entitlements. These are welcome changes and will potentially make rights issues a preferred option to raise capital for listed companies.

Whilst rights issues are offerings to existing shareholders, it typically takes 55 to 58 days to complete the process (excluding SEBI review and the time taken for due diligence and drafting the offer document). The process involves (i) a minimum 15-day rights issue application period, (ii) mandatory participation by certain investors only through the non-ASBA process (such as through cheque) and (iii) a seven clear working days intimation prior to the record date. SEBI has addressed some of these concerns through amendments to the SEBI ICDR Regulations, SEBI Listing Regulations (both effective from December 26, 2019) and a circular with effect from February 14, 2020.
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