Traditionally it has been observed that the Trust route has been subject to misuse and hence there are certain regulatory factors which need to be considered for employeestock award scheme(s)
Employee Stock Awards (stock awards) is awell-knowncompensation reward strategy implemented by many organisations for their employees.While the advantages of introducing a stock awards scheme are manifold, many companies are not aware of the business and regulatory considerations of such awards.
Since the stock scheme would involve issuance of shares to the employees, the provisions of the Companies Act, of the Securities and Exchange Board of India ('SEBI') regulations and that of tax lawswill also need to be considered.
Indian companies need to comply with Companies Act, 2013, read withCompanies (Share Capital and Debentures) Rules, 2014 ('Rules') for implementation of stock award schemes. Additionally, listed companies also need to comply with specified SEBI regulations. Many corporates create a stock pool by issuance of new shares.
However, this would result in increased share capital (i.e. dilution). Hence, many companies may choose to meet the requirement through secondary purchase. Let us dwell on why corporates may choose to implement the scheme through a Trust and the process required for the same.
There are several business or regulatory considerations that may drive corporates to use an Employee Trust ('Trust') for implementation and management of such employee stock award scheme(s).Some of these are -
However, traditionally it has been observed that the Trust route has been subject to misuse and hence there are certain regulatory factors which need to be considered foremployee stock award scheme(s). Corporates would need to establish a Trust under the Indian Trust Act. Further,approval of shareholders has to be taken upfront for implementation via the Trust.
Some other important factors to be considered are:
As can be seen from above, for use of the Trust route it is imperative to understand applicable regulatory considerations, apart from business considerations. Further, the Trust may also have potential tax implications that need to be examined. The stock award income will be taxable in the hands of employees as per specified provisions. Thus, apart from the above regulatory considerations, it is also imperative to evaluate overall tax implications because of the use of Trust route.
(Information for the editor for reference purposes only)
(Aarti Raote is Partner with Deloitte India, Jimish Vakharia, is Senior Manager and Mayur Deokar, is Deputy Manager, Deloitte Haskins & Sells LLP)