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Informal Guidance on applicability of SBEB Regulations

Finsec Law Advisors

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In an informal guidance issued to JK Paper Ltd. (“Company”), SEBI clarified that a trust set up for the welfare of the employees of the company and which receives its income from securities of that company would be considered to involve dealing in securities, and is required to comply with the provisions of the SEBI (Share Based Employee Benefits) Regulations, 2014 (“SBEB Regulations”).

The SBEB Regulations, notified in 2014, apply to five types of schemes – namely: (a) employee stock option schemes; (b) employee stock purchase schemes; (c) stock appreciation rights schemes; (d) general employee benefits schemes; and (e) retirement benefits schemes – and prescribes certain mandatory compliances for listed companies having any of the aforesaid schemes. Further, Regulation 1(4) of the SBEB Regulations states that the provisions of the SBEB Regulations shall be applicable to any listed company which has a scheme for the benefit of its employees and which involves dealing in securities of the company.

The Company had set up a private trust (“Trust”) for the purpose of conferring welfare benefits, in the form of welfare schemes such as medical assistance scheme, educational scholarship scheme, etc, for its employees. The Trust held 5.6% of the equity share capital of the Company. The welfare schemes are funded entirely from the earnings of the Trust by way of dividend income, interest, or any other income of the Trust. The Company submitted that all benefits under the said schemes are disbursed by way of cash or cheque, and that none of the benefits conferred are share based. As the Trust does not implement/administer any scheme to grant any shares or option of shares of the Company to the employees, the schemes administered do not involve dealing in securities. Therefore, the Company was of the opinion that SBEB Regulations should not apply to the Company and the Trust. In light of this, the Company sought a clarification from SEBI as to whether the welfare schemes floated by the Trust fell within the purview of the SBEB Regulations.

SEBI disagreed with the Company’s interpretation and said that as the Trust was generating a part of its income from the securities held by it, including securities of the Company, the welfare schemes run by the Trust would be considered to involve dealing in securities of the Company. Therefore, the SBEB Regulations would apply to the welfare schemes floated by the Trust.

SEBI has adopted the right approach as a contrary interpretation would incorrectly remove such company trusts from the purview of the SBEB Regulations.