Business Times

SEC seeks to regulate Share Option schemes

By Duruthu Edirimuni Chandrasekera

In a bid to fill the gaps in the existing regulation on Employee Share Option Schemes (ESOS) of publicly listed firms, the Securities and Exchange Commission (SEC) has called for comments on a consultation paper on new rules for ESOS.

"There’re gaps in the existing rules for ESOS and these don't reflect international best practices," Surana Fernando, Director Corporate Affairs told the Business Times. Explaining some of these, she said that the total number of ESOS to be issued by a listed entity should ideally not be more than 5% of the total number of shares issued in keeping with international best practices. "We have included the 5% threshold in the new regulation,” she said, adding that currently there isn’t any ceiling.

She said that the new rules also state that any single director/employee is only entitled for no more than 1% of the total number of shares issued through the ESOS. A capital market expert noted that now, some major shareholders of listed firms manipulate control through ESOS. "The new rules will give adequate protection to the investors,” he said.

The new regulation also provide for an implementation and monitoring by a committee/board when an ESOP is decided by a firm, with members who don't have a conflict of interest. These rules have also covered some existing ESOS, which are not regulated under the present rules. "These schemes were incorporated before the year 2000, when the existing rules were established," Ms. Fernando said.

She said that firms with such ESOS (currently) can purchase their own shares from the market and then allocate these shares to the employers. Now they must issue new shares,” she added. Some firms where ESOS are held in share trusts are recommended to allocate them to the staff or dispose them (in the stock market). "This particular rule stops anyone from manipulating a listed firm’s control through an ESOS,” the capital market expert said.

According to the SEC, ESOS are an important facet of corporate dynamics as it is a way by which employers reward employees and also afford employees an opportunity to become stakeholders of the company in both their capacities as employees and owners of the company.

“It is a mechanism which provides employees an added incentive to work towards the success of the company and also provides them an opportunity to become involved in decision making in their role as shareholders,” it said.

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