August 7, 2004
Ms Neelam Bharadwaj
General Manager,
Securities and Exchange Board of India
Mittal Court, A Wing, Ground Floor
Nariman Point
Mumbai
Dear Ms Neelam Bharadwaj,
Sub : Application under SEBI (Informal Guidance Scheme), 2003
1. Holding period of 30 days for shares arising out of exercise of Stock Options.
A. Requirement
Regulation 4 to 4.2 of Part A to Schedule I of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 provides as under.
4.2 All directors/officers /designated employees shall hold their investments in securities for a minimum period of 30 days in order to be considered as being held for investment purposes. The holding period shall also apply to subscription in the primary market (IPOs). In the case of IPOs, the holding period would commence when the securities are actually allotted.
Rationale
Rationale for the holding period applicable to the Directors and Officers and Designated Employees under the Code seems to be on the footing that these Directors, Officers and Designated Employees have to be treated differently compared to non- insider shareholders.
This provision goes against the spirit of stock options and cash less exercise as shares are to be freely transferable after exercise. Such shares received on exercise of stock options will, however, be continued to be governed by pre- clearance of trades by Designated Employees, Directors and Officers.
The 30 day freeze exposes them to market fluctuations in the share value and makes the stock options unattractive.
B. Recent changes
SEBI had proposed certain changes in the month of April, 2004 in the SEBI (ESOP and ESPS) Guidelines, 1999. In addition to changes in such guidelines, certain other changes were also proposed. One of changes proposed was to relax the requirement for the holding period of 30 days in the case of shares allotted as a result of exercise of Stock options granted to the employees.
The text of the proposals put forward by SEBI during April, 2004 in its website together with its committee’s recommendations is reproduced below for ready reference.
Quote
Code of conduct for Prevention of Insider Trading:
The committee noted that in terms of Clause 4.2 of the Model Code of Conduct for Prevention of Insider Trading for listed companies, employees are required to hold their investments in securities for a minimum period of 30 days from the date of allotment. In this respect, the committee noted that as per ESOP guidelines there is a minimum one year lock-in on the shares allotted under ESPS and on options granted under ESOS. In case of ESOPs, as the employees have already held the options for one year, the date of allotment (for the purpose of Clause 4.2 of the Model Code of Conduct) shall be taken as date of grant of options and in case of ESPS, the said date of allotment shall be taken as the date of allotment of shares under ESPS.
D. Proposal to treat the date of Grant of Options as the date of Allotment- No Action/ Intepretative Letter
We seek SEBI’s No Action/ Interpretative letters for treating the date of grant of options as the date of allotment in case of ESOP and the date of allotment of shares under ESPS as the date of allotment while calculating the period of 30 days as per clause 4.2 of the Model Code of Conduct for Prevention of Insider Trading.
An application fee of Rs 25,000 vide Demand Draft no. 168576 dated August 7, 2004 drawn in favour of Securities and Exchange Board of India drawn on State Bank of India 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
Encl : a/a- Cheque for Rs 25,000
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/22001 /2004
September 29, 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 letter dated August 7, 2004 seeking “No-Action/ Interpretive Letter” for treating the date of grant of options as the date of allotment in case of ESOP and the date of allotment of shares under ESPS as the date of allotment while calculating the period of 30 days as per clause 4.2 of the Model Code of Conduct for Prevention of Insider Trading.
It is represented by you inter alia that Regulation 4.2 of Part A (Model Code of Conduct for Prevention of Insider Trading for Listed Companies) to Schedule I of SEBI (Prohibition of] Insider Trading) Regulations, 1992 (hereinafter referred to as the Insider Trading Regulations) requires all directors/ officers/ designated employees to hold their investments in securities for a minimum period of 30 days in order to be considered as being held for investment purposes. The rationale for the holding period applicable to the Directors and Officers and Designated Employees under the Code seems to be on the footing that these Directors, Officers and Designated Employees have to be treated differently compared to non-insider shareholders. It is therefore represented by you that the aforesaid provision goes against the spirit of stock options and cash less exercise as shares are to be freely transferable after exercise and the 30-day freeze exposes them to market fluctuations in the share value and makes the stock options unattractive. However, such shares received on exercise of stock options will continue to be governed by pre-clearance of trades by Designated Employees, Directors and Officers (as stipulated in clause 3.3 of the Insider Trading Regulations). You have also referred to the Recommendations made by the Committee on ESOP regarding amendments to the
SEBI (ESOS and ESPS) Guidelines, 1999 (hereinafter referred to as the ESOP Guidelines) which were put up on the SEBI Website in April 2004. In this regard, you have represented that, in addition to the proposed changes in the ESOP Guidelines, certain other changes were also proposed in the aforesaid recommendations. One of changes proposed was to relax the requirement for the holding period of 30 days in case of shares allotted as a result of exercise of stock options granted to the employees. In view of the above, you have sought the aforesaid informal guidance.
Your aforesaid request is based on the recommendations made by the Committee on ESOP. However, SEBI has not yet carried out any amendments in this regard to the Insider Trading Regulations. As such, your aforesaid request is beyond the purview of the existing ESOP guidelines and Insider Trading Regulations and would require amendments to be made to them. In view of the above, 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 August 7, 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