Amidst the controversy of Madhabi Puri Buch, chairperson of the Securities & Exchange Board of India (SEBI), earning money from employee stock ownership plan (ESOP) proceeds and her denial of this, Dr Nanda Kumar from Cochin pointed out a loophole in SEBI's extant rules and guidelines that allows exercising ESOPs during the window trading period.
Dr Kumar, former director for marketing & technical at Fertilisers And Chemicals Travancore (FACT) Ltd, says, "According to the extant rules, key managerial persons (KMPs) cannot transact in shares during 'window closure periods' being privy to insider information, but SEBI rules do not prevent them from exercising stock options -ESOPs during this period. In my opinion, this is a paradox and exercising stock options should be treated exactly like transacting in shares. The current controversy is because of this loophole."
In November 2022, he wrote to SEBI, including the chairperson, about the loophole but said he did not even receive acknowledgement for his email.
According to media reports, the public accounts committee (PAC) of Parliament chaired by Congress leader KC Venugopal has called for a scrutiny of SEBI's financial performance. The PAC has summoned Ms Buch and other officials of SEBI on 24th October.
According to
Moneycontrol, this investigation comes as part of the PAC's review of regulatory bodies established by Acts of Parliament, introduced as an agenda item during its meeting on 29 August 2024.
"PAC is likely to summon SEBI chairperson Ms Buch in its next meeting. It will be a performance review of the regulator," the official told the news portal.
Dr Kumar also sent an email to Mr Venugopal, the chairman of the PAC. "Had the issue pointed out been reviewed and necessary amendments effected in the SEBI guidelines, the current ambiguity could have been avoided."
"It is only logical and ethical that SEBI considers exercising ESOS or ESOP exactly the same way as transacting in equity shares. If a person has options from any Company outstanding in his/her name at the time of joining a regulatory body, either he/she should exercise them prior to joining the regulatory body or allow them to devolve or keep the options open if their validity permits until relinquishment of the office," he added.
In his 15 November 2022 email, Dr Kumar says SEBI probably made the decision on the premise that since the price at which a KMP or employee exercises the option is already fixed, he or she cannot benefit from privileged information. "This does not take into consideration the implication of income tax (I-T) or capital gains tax (CGT). Probably, the guidelines are made based on the Securities & Exchange Commission (SEC) guidelines in the US, where this aspect could be different."
According to the extant I-T rules in India, a key managerial personnel (KMP) or employee exercising employee stock option scheme (ESOS) is liable to pay income tax for the difference between the prevailing market price of the share and the price at which he/she got it.
Dr Kumar also shared an example where the current price of a scrip is Rs50 and the employee can exercise it at Rs25. Suppose, during the trade window closure period, he becomes aware that the results are great (privileged information) and the market price is likely to go up after the announcement. If he redeems his options now, he has to pay I-T for Rs25 only, and if he waits for the results and if the price goes up to Rs75, he needs to pay income tax for Rs50.
"Now, when he sells the shares at Rs100 after the period for long-term capital gains (LTCG), he pays LTCT tax at 10% for Rs50 and in the second case for Rs25. If he is in a tax bracket of above 10%, he will definitely benefit when we consider the total income tax and LTCG liabilities. Moreover, the LTCG has to be paid at a later date, but increased I-T for exercising the option after the result announcement is to be paid immediately," he explains.
In the November 2022 email, Dr Kumar says, "It is evident that the KMP or employee can enrich oneself by exercising or not exercising ESOS during trade window closure period leveraging on privileged information; hence, that act is illegal and unethical."
Earlier, the Congress party alleged that between 2017 and 2024, Ms Buch earned a hefty Rs16.80 crore (around US$2.1mn—million) from the ICICI group in the form of salary, income from ICICI Prudential, ESOP proceeds, and the group even paid the tax deducted at source (TDS) on these earnings.
However,
Ms Buch and Dhaval Buch, her husband, denied all these allegations in their second joint statement. "Like other senior ICICI Group employees, Madhabi received ESOPs during her tenure. Only employees who resigned were required to exercise their vested options within three months. Those who retired (like Madhabi ) were allowed to exercise their vested options for up to 10 years. As already confirmed by ICICI Bank in its public statement, Madhabi retired from ICICI Bank, which allowed her a 10-year window to exercise her options."
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