In a notification, SEBI has barred all public companies from having their ESOP trusts buy shares from the secondary market. ESOP trusts can only be allocated shares by the company directly (new shares).This applies to any new ESOP plans immediately, and existing ESOP trusts by Jun 30, 2012.
I had noted this in my post in August, from the SEBI Board Meeting minutes, that SEBI would bar such activity. Abuse by companies involve giving their ESOP trusts money to buy shares and thus manipulate prices in the market.
In the Network 18 case, the company effectively gave its assets as collateral so that the trust could buy shares in the market. It's quite like borrowing money in order to buy its own shares, and the number of shares bought was MUCH more than the option pool size. This is nothing but abuse of the ESOP rules, which has now been plugged, with SEBI Saying:
It has come to the notice of SEBI that some listed entities have been framing their
own employees benefit schemes wherein Trusts have been set up to deal in their
own securities in the secondary market, which was not envisaged within the purview
of SEBI (ESOS and ESPS) Guidelines 1999.
It is apprehended that some entities may frame such schemes with the purpose of
dealing in its own securities with the object of inflating, depressing, maintaining or
causing fluctuation in the price of the securities by engaging in fraudulent and unfair
trade practices. Such dealing in the company’s shares by the Trusts may also raise
regulatory concerns regarding compliance with SEBI (Prohibition of Fraudulent and
Unfair Trade Practices relating to the Securities Market) Regulations, 2003 and SEBI
(Prohibition of Insider Trading) Regulations, 1992.
In the Veritas-Indiabulls case, we noted that the Employee Welfare Trust (EWT) was given loans of Rs. 900 cr. at 12% p.a. by Indiabulls, in order to buy shares from the market. In that post, I'd noted a solution:
The only thing we can do to avoid this is to disallow ESOP trusts from buying shares directly from the market. They should only get fresh shares issues from the company at a certain price, and that also only on exercise.
It feels nice when the regulator has similar views!
Of course, this still doesn't plug the odd case like CRISIL where the company's buying back shares from the market while at the same time issue new shares to employees. However that can be addressed separately.
Meanwhile, all companies now need to report how many shares they have bought on which date, and at what price, since April 2012. It would be great if SEBI reveals such information to the public - that way we can see which company's trusts might have "manipulated" shares. (And thus, avoid such companies post June 30!).