April 29, 2004
Mr S C Das
Executive Director
Securities and Exchange Board of India
Mittal Court, A Wing, Ground Floor
Nariman Point
Mumbai
Dear Mr Das,
Sub : Application under SEBI (Informal Guidance Scheme), 2003
1. Issue of ESOPs in the form of Restricted Stock Units to Employees of Associate companies.
A. Requirement
Wipro is in the process of framing a policy for implementing the grant of ESOPS/ ESPS/ RSUs (Restricted Stock Units in the nature of ESOPS but granted at exercise prices much lower than the market prices at the time of grant) to employees of associate companies in which its investment is lower than 50% but more than 30% of the paid up capital of the JV company. All these schemes will be in line with the SEBI Guidelines framed from time to time.
B. Regulatory Issues
As per clause 4.1 to 4.3 of SEBI (ESOP and ESPS) Guidelines, 1999 only employees, directors (other than promoter directors) are eligible to participate in the ESOP and ESPS schemes.
As per Clause 2.1 of the same guidelines, Employee means
a) a permanent employee of the company working in India or out of India; or
b) a director of the company, whether a whole time director or not; or
c) an employee as defined in sub-clauses (a) or (b) of a subsidiary, in India or out of India, or of a holding company of the company.
The term employee includes employees of subsidiary companies and does not include the employees of Associate Companies.
As per explanation to Section 8.3.4 of Disclosure and Investor Protection Guidelines (DIP), reservation in public issues is made for employees of group companies apart from employees of the companies making an IPO.
As per Regulation 8 FEMA (Transfer or issue of security by a person resident outside India) Regulations, 2000, Esops are permitted to be issued also to employees of the joint venture company (including non resident employees) irrespective of the percentage of holding by the Indian company in that foreign company.
C. Issues facing the Company
Apart from several subsidiaries, Wipro has got two joint ventures– one with a US company (in which the US company holds 51% and Wipro owns 49%) and another JV being an Indian company in which Wipro holds 39% and the rest being held by ex-employees of Wipro and employees of that joint venture company. Both these companies fall under the definition of Associate Companies as per clause 5.4.1 of the SEBI (DIP) Guidelines, 2000.
In the JV with the US company, board actions are taken on the basis of consensus and the Chairman is Mr Azim Premji. Both the JV partners have a reason to flourish and grow both in India and abroad. US Company is able to offer its ESOPs to the employees of this joint venture company as the JV company is the subsidiary of the US company and employees of the subsidiary can be offered ESOPs by the US Company. However, Wipro, the other JV partner is not in a position to offer its ESOPs to the employees of the JV. Wipro has got similar interests in offering Esops etc to the employees of these associate companies just as it has interest in offering the same to its own employees.
In the other JV company Wipro holds close to 39% and intends to grant Esops to employees of the JV company. This will again boost the morale of the employees and Wipro’s interests in granting Esops to employees of this JV company are similar to that of granting Esops to its own employees.
If grant of ESOPS and related instruments are permitted to be issued to employees of these Associate companies, it will not only give a level playing field but also motivate the employees of these associate companies to meet their planned targets and achieving their objectives. This will also remove the anomaly between FEMA and SEBI guidelines on this issue.
D. Proposal to include employees of associate companies as eligible persons under ESOP- No Action/ Intepretative Letter
We seek SEBI’s No Action/ Interpretative letters for grant of ESOPs/ESPS and other like instruments to employees of Associate Companies in which Wipro holds more than 30% of the paid up capital of that Associate company in the same manner and to the same extent the employees of the issuing company or its subsidiaries are permitted to be granted ESOP/ ESPS etc by that Company.
E. Proposal to include Business Associates also as eligible persons under ESOP
Currently, in India, Companies are permitted to grant ESOP/ ESPS only to their employees or employees of their subsidiary companies. Stakeholders like Business associates who are not employees are not eligible for ESOP/ ESPS under the current SEBI guidelines. In the US and other developed countries, Companies are free to issue options/ Stock Awards to their business associates. This enables Companies to build better relationship with their business associates.
Inability of Indian Companies to grant options, particularly to business associates results in the Indian Company not being eligible for a level playing field. This often results in Indian companies being handicapped as compared to its competitors from overseas when making a pitch for prospective business customers.
The business associates are typically consultants who possess niche experience, skills and expertise in a particular field of activity. In many a case, companies have to appoint these business associates and business consultants to help them with emerging areas such as IT outsourcing, Mergers & Acquisitions as well as in areas relating to certain Technical expertise. The expertise that these consultants bring is invaluable and helps in effectively and favourably positioning the Indian companies while making bids for large transactions. By the grant of such options, the Company could leverage on these consultants on a sustained basis and would help in enhancing the commitment of these consultants to the task on hand.
Request for No Action/ Interpretative letters
It is therefore requested that permission be granted for issue of stock options to such business consultants/associates to an extent not exceeding 1% of the total issued capital of the Company .
We seek SEBI’s No Action/ Interpretative letters for grant of ESOPs/ESPS and other like instruments to Business Associates provided that Esops etc to such Business Associates does not exceed 1% of the total issued capital of the company in any given year. Alternatively, we request for No Action/ Interpretative letters for grant of ESOPS/ ESPS and other like instruments only to our Business Associates located abroad.
2. Transferability of Stock Options and cash less exercise
Clause 11.1 of the guidelines restricts the transferability of stock options issued to employees.
Existing – Clause 11
11. Non transferability of option
11.1 Option granted to an employee shall not be transferable to any person.
11.2 (a) No person other than the employee to whom the option is granted shall be entitled to exercise the option.
(b) Under the cashless system of exercise, the company may itself fund or permit the empanelled stock brokers to fund the payment of exercise price which shall be adjusted against the sale proceeds of some or all the shares, subject to the provision of the Companies Act.
Issues facing the Optinees
As per clause 11.1 options issued to employees are not transferable to any other person. This results in difficulties in the cash less exercise of the options. The Stock option holders have to presently apply and pay for the shares and only later transfer these shares. As a result, employees whose stock options are vested cannot sell the same immediately and have to go through the following process :
a. Exercise the vested options
b. Get the shares allotted pursuant to the exercise of options.
c. Get the shares credited in the demat account post allotment.
d. Give instructions to sell the shares in a stock exchange through the broker.
e. Submit Delivery instructions through the Depository Participant for sale of demat shares
f. Realizing the money from the broker.
The above process takes anywhere between 20 to 30 days. The current process also does not lead to a cashless exercise as the option holder has to pay for the shares first and then get sale consideration.
We request that transferability of options be permitted quite similar to that of transferability of rights entitlement in a rights issue of shares. There is no requirement for the shareholder to first subscribe to the rights shares and then sell the shares on a later date. Similarly, in case of stock options, the option holder should be allowed to transfer/ sell the options so that the option holder gets the difference in price without investing cash upfront, also called as ‘cash less exercise’.
Underwater options are stock options whose exercise price is more than the prevailing market price. As a result the option holder will not have any gain from exercising the shares. We also recommend permitting transfer of underwater options by the option holder.
Request for No Action/ Interpretative letters
We seek SEBI’s No Action/ Interpretative letters for Transferability and Cash less exercise of stock options by the Optionees.
3. Listing Agreement - Mandatory reporting of quarterly, half-yearly and annual financial results on a stand alone basis
In 2001-02, most companies adopted the consolidation of accounts in line with the accounting standards that had become mandatory. Currently, companies are disclosing the following to the stock exchanges for public dissemination;
- summary of results in line with consolidated accounts for the period
- press release of the results in accordance with consolidated Indian GAAP
- consolidated segmental accounts for the period in the format prescribed
- results of the stand-alone Parent company in the format prescribed (which is a mandatory requirement under Clause 41 in addition to disclosure of consolidated financials)
In addition to the above, to comply with the listing requirements and provisions of Securities Exchange Commission, accounts are also prepared and published in accordance with the US GAAP both in India and overseas.
Problems/Concerns pursuant to the above methodology of disclosure
Prior to 2001-02, companies have been disclosing three sets of results viz Indian GAAP stand alone financials, Indian GAAP consolidated financials and the US GAAP financials (this is on a consolidated basis).
Pursuant to the above, reconciliation between three sets of data is required to be provided to make the investor understand the difference between the three. The overload of information for the investor can reduce the effectiveness of analyses as more time is spend on just understanding the data instead of analyzing it.
The stand alone Indian GAAP financials especially after the introduction of Consolidated Indian GAAP financials is a concept, which is redundant because all interested analysts and investors look at consolidated accounts and not standalone financials. In fact, standalone financials are relevant primarily for Indian tax purpose and not so much for any other purpose. The consolidated accounts are the true reflection of the company which exists as standalone as well as through its subsidiaries and associates.
Interpretative letter required
We request an “interpretative letter” from SEBI so as to permit only publishing and reporting of consolidated results of a company on a segment reporting basis as well as on a total basis and without any disclosure of standalone financials subject to the condition that such information will be posted on the Company’s Web site.
- Announcement of Financial Results within 15 minutes under Clause 41 of the Listing Agreement
Currently, as per Clause 41 of the Listing Agreement, listed companies are required to announce their audited financial results within 15 minutes from the closure of the Board meeting in which the financial results are approved.
The above restriction impacts the globally listed companies in taking care of declaration of results after the closure of the US Stock Exchanges. Unlike in India, declaration of results during trading hours of overseas Stock Exchanges may result in temporarily halting trading in company’s shares immediately after the announcement.
Declaration of results fall under Para 202.06 (A) of NYSE Listed Company Manual (similar to Listing Agreements in India) requiring ‘Immediate Release’ to the Stock Exchanges. As per Para 202.06(B) of this Manual any ‘material’ event which calls for ‘immediate release’ shall be made shortly before the opening or during the trading hours.
However, it has been recommended by NYSE that the company should notify the Exchange of the news at least ten minutes before the release to the media. This is to enable the exchange to consider whether or not the trading in the security should be halted. Due to this reason companies announce the results only before or after the closure of the trading hours of the Stock Exchanges. As per Regulation FD – Rule 101 of the Exchange Act Rules in US the intimation to be sent promptly shall be sent as soon as practicable, but in no event after 24 hours or commencement of next day’s trading on the NYSE, whichever is later.
Example:- If Day 0 is the day on which Board approves the results, say at 7 PM, then ordinarily the results ought to be announced by 7.15 PM India time. This will result in announcement being made in US Exchanges during trading hours. As a result, we are constrained to hold the Board meeting at the early hours of the morning (India time) to take care of the requirement of the both the overseas exchanges as well as the Indian Stock Exchanges.
Hence, we request you to consider waiving the requirements of announcement of results within 15 minutes from end of the Board meeting so that Board meeting can be concluded after the closing hours on Day 0 and to announce results on the opening hours of Day 1 with a maximum time gap between the approval of the results and the announcement not exceeding 24 hours. This will also be in line with the requirements of disclosure in US stock exchanges.
No Action/ Interpretative letter required
We request a “No Action/ Interpretative letter” to the effect that though the Board approves the financial results on Day 0, the declaration of financial results to the Stock Exchanges shall take place on Day 1 as per India time (which will be after the close of the Stock Exchanges in the US) with a maximum time interval between the approval of the results by the Board and the announcement to the Stock Exchanges not exceeding 24 hours.
- Intimation of results by FAX
Currently, as per clause 20 and 21 of the Listing Agreement, all communications to be sent on an urgent basis to the Stock Exchanges are required to be sent by FAX only. In the present circumstances, when electronic communication has become common and widely prevalent, it is suggested that email communication by way of scanned copies of the letters should also be recognized as a means of communication to stock exchanges.
No Action/ Interpretative letter required
We request “No Action/ Interpretative letter” (subject to its acceptance by the Stock Exchanges) to the effect that the scanned copy of the intimation sent to the Stock Exchanges by email be treated as valid in addition to the communication sent by Fax provided that the email is also followed by Fax message to the Stock Exchanges on the subject.
An application fee of Rs 25,000 vide cheque no. 204574 dated April 21, 2004 drawn in favour of Securities and Exchange Board of India drawn on HSBC payable at Mumbai is enclosed. Please treat the contents of the letter as confidential for a period of 90 days in terms of clause 11.a of SEBI (Informal guidance) Scheme, 2003.
Thanking You,
Yours Faithfully,
For Wipro Limited
V. Ramachandran
Company Secretary
-----Original Message-----
From: ramachandran.venkatesan@wipro.com [mailto:ramachandran.venkatesan@wipro.com]
Sent: Thursday, June 17, 2004 5:16 PM
To: srishtijc@sebi.gov.in
Subject: RE: Sebi Guidance Scheme
Dear Ms Srishti,
Please refer telephonic discussions on the subject. As required please find enclosed herewith text of FEMA (Transfer or issue of security by a person resident outside India) Regulations, 2000 which has been downloaded from the RBI's website.
We would also like to state that last para of item no 3 of our Letter dated April 29, 2004 should read as
We request a “No Action” from SEBI instead of "Interpretative Letters". Other contents of the para remain unchanged.
Kindly accept our application and accord necessary approvals in terms of our application.
Thanking You,
Yours Faithfully,
For Wipro Limited
V. Ramachandran
Company Secretary
June 22, 2004
Ms Srishti Chavan,
Officer, Division of Issues and Listing,
Corporation Finance Department,
Securities and Exchange Board of India
Mittal Court, A Wing, Ground Floor
Nariman Point
Mumbai
Dear Ms Srishti Chavan,
Sub : Application under SEBI (Informal Guidance Scheme), 2003
Please refer our letter dated April 29, 2004 and the subsequent emails of June 17 and June 18, 2004 on the subject.
In continuation of our earlier correspondence on the subject, we would like to seek SEBI’s Guidance on the following issue also in addition to the issues raised by us earlier.
- Regulatory Issues :Currently, as per clause 22.8 of the SEBI (ESOS and ESPS) Guidelines, 1999 company is required to appoint Merchant Banker for the implementation of ESOS and ESPS as per the guidelines. As per the recommendations made by Sebi’s committee on the subject and put up for public comments, these amendments are proposed to be made effective for Esop Schemes approved on or after 30th June, 2003.
- Issues facing the Company Currently, our Company has three Esop Schemes which have been framed before June 30, 2003 in accordance with the SEBI Guidelines. The Compensation Committee has been empowered to decide on many of the issues arising out of the Esop Plans in terms of clause 5.3 of the Guidelines and has been carrying out the required functions in terms of that clause and as per the Charter of the Compensation Committee. Certificate of the Auditors is also furnished in terms of clause 14.1 of the guidelines at every annual general meeting.
In view of the roles played by the Compensation Committee and the certification by the auditors, appointing a merchant banker may not result in any benefit. We, therefore, request that due to the certification requirement by the auditors and Compensation Committee overseeing the functioning of the scheme, we should be exempt from the requirement of appointment of merchant banker for the ESOS/ ESPS schemes.
- No Action/ Interpretative letter required
In view of the above submissions, we request “No Action Letter” so that our Company can be exempted from the requirement of appointment of merchant banker for the implementation of ESOS and ESPS framed on or after June 30, 2003 also.
Thanking You,
Yours Faithfully,
For Wipro Limited
V. Ramachandran
Company Secretary
DEPUTY GENERAL MANAGER
CORPORATION FINANCE DEPARTMENT
DIVISION OF ISSUES AND LISTING
( (Direct) : 22842826
( (Board) : 22850451- 56, 22880962 - 70 (Extn.: 367)
Fax : 22045633
E-mail : neelamb@sebi.gov.in
CFD/DIL/SC/ 18485 /2004
August 23, 2004
Shri V. Ramachandran
Company Secretary
Wipro Ltd.
Doddakannelli,
Sarjapur Road,
Banglore – 560 035.
Dear Sir,
Sub.: Request for No Action/ Interpretive Letter under Securities and Exchange Board of India (Informal Guidance) Scheme, 2003.
This is with reference to your letters dated April 29, 2004, June 17, 2004 and June 22, 2004 seeking “No-Action/ Interpretive Letter” in respect of the issues which are detailed below [arising under the SEBI (ESOS &ESPS) Guidelines, 1999 and the continuous disclosure requirements in the Listing Agreement]. At the outset, we would like to inform you that the scope of the Informal Guidance Scheme is only to provide interpretation (with particular regard to enforcement action) of existing provisions. It does not extend to providing exemption from existing provisions or to amending the existing provisions. The issues are analysed as under:
1. Permission to issue ESOPs in the form of Restricted Stock Units to employees of associate companies and to business associates.
Our view – ESOPs can be issued only to employees of the listed company as defined in clause 2.1(1) of the SEBI (ESOS & ESPS) Guidelines, 1999. Thus they cannot be issued either to employees of associate companies or to business associates.
2. Permission for transferability of stock options and cashless exercise.
Our view – Clause 11.1 of the ESOS & ESPS Guidelines prohibits transfer of options whether underwater or otherwise. Cashless exercise of stock options issued to employees is not prohibited by the said Guidelines since what are being transferred in case of cashless exercise of options, are not the options as such, but the shares
arising out of exercise of the options. In fact clause 11.2(b) allows the company to facilitate cashless exercise in the manner mentioned in that clause. However, it has to be noted that in respect of options granted to ‘designated employees’ (as defined in clause 1.2 of Part A of Schedule I <Model Code of Conduct for Listed Companies> of the Insider Trading Regulations), cashless exercise would not be possible by virtue of the requirement in clause 4.2, which requires a minimum holding period of 30 days in respect of their investments in the securities of the company.
3. Exemption from the requirement of appointment of merchant banker for implementation of ESOS and ESPS.
Our view – Exemption cannot be granted under the Informal Guidance Scheme.
4. Listing agreement – Mandatory reporting of quarterly, half-yearly and annual financial results on a stand alone basis in addition to that on consolidated basis to be dispensed with.
5. Announcement of Financial Results within 15 minutes of conclusion of the Board meeting under clause 41 of the Listing Agreement – request to permit announcement on the next trading day within 24 hours of conclusion of the meeting.
6. Intimation of results to the stock exchanges by FAX – request to permit communication of scanned copies of letters by e-mail.
Our view on issues 4 to 6 – These suggestions would require amendments to the Listing Agreement and cannot be granted under the Informal Guidance Scheme.
For the above reasons, we express our inability to issue the no action/ interpretive letter as requested by you.
This position is based on the representation made to the Division of Issues and Listing in your letters dated April 29, 2004, June 17, 2004 and June 22, 2004. Different facts or conditions might require a different result. This letter expresses the Division’s position on enforcement action only. It does not express decision of the Board on the questions presented.
Yours faithfully
Neelam Bhardwaj