Market regulator the Securities and Exchange Board of India (SEBI) has barred employee welfare schemes and trusts of listed companies from buying their own shares from the capital market.
The move amounts to speculation and it was a practice adopted by many listed companies, said industry experts.
SEBI will also ask listed companies to disclose their existing employee benefit schemes involving stock purchases and align them in accordance with its employee stock options scheme (ESOS) and employee stock purchase scheme (ESPS) guidelines within a given timeframe.
“If listed companies buy their own shares through employee welfare trust the whole purpose of setting up such a trust is defeated,” said Prithvi Haldea, chairman, Prime Database.
“In such a situation employees have no control on whether or not to buy the company’s share and it leads to malfunctioning.”
SEBI’s ESOS and ESPS guidelines allow listed companies to reward their employees through stock option schemes and stock purchase schemes.
The market regulator’s crackdown against unregulated staff welfare schemes and trusts has comes amid concerns that some companies may be funding these schemes to deal in their own securities, with an aim to manipulate the share price by engaging in fraudulent and unfair trade practices.
The regulations prohibit the companies from buying their own shares, unless it is consequent to reduction of capital and for certain regulatory requirements.
The companies are also not allowed to give any loan, guarantee or other financial assistance for purchase of any shares in the company or in the holding company.
However, these restrictions do not apply, if the company provides funds to a trust set up for the benefit of employees and the trust utilise such funds for purchase or subscription of shares in the firm or its holding company.