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Informal Guidance on stock brokers funding acquisition of securities by employees of listed companies

Finsec Law Advisors

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In an informal guidance issued to Way to Wealth Brokers Pvt. Ltd. dated July 20, 2020, SEBI clarified that a stock broker is permitted to fund the acquisition of securities of a listed company by their employees, who propose to exercise a cashless option to avail employee benefits.

The Applicant, approached by a listed company, proposed to fund the acquisition of shares by eligible employees who were offered Restricted Stock Units (RSU) by the said company as part of their compensation plan. For eligible employees who may want to avail cashless funding for acquiring shares under the RSU scheme, pursuant to appropriate authorizations, the Applicant proposed to first credit funds to the bank accounts of the employees, then onward transfer the same to the listed company’s designated bank account to process the allotment of shares. Thereafter, the company would credit the allotted shares directly to the DP account of the employees held with the Applicant. Finally, the shares to the extent of cashless funding and transaction charges would be sold and sale proceeds thereof would be adjusted towards cashless funding services offered by the Applicant.

SEBI clarified that under Regulation 9(2) of the SEBI (Share Based Employee Benefits) Regulations, 2014 (“SBEB Regulations”), a listed company may permit empanelled stock brokers to fund the payment of exercise price for their employees, which shall be adjusted against the sale proceeds of some or all the shares of the employees, subject to the provisions of the applicable law or regulations. Further, SEBI clarified that the extant SBEB Regulations do not prescribe any maximum limit on amount per unit/ security that can be funded.

In the aforementioned informal guidance, SEBI has adopted a pragmatic approach and not imposed restrictions on funding services that can be offered by stock brokers to facilitate the exercise of options by employees of listed companies under the provisions of the SBEB Regulations.