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In the absence of facilitative guidelines till June ‘99, the Indian practice so far has been to create Trusts (Special Purpose Vehicle) and issue either shares or convertible warrants. The warrants may have some perceived initial advantages due to the low cost of funding required for the trust. There are, however, some difficulties that need to be overcome such as the difficulty in apportioning the value of bonus, rights and dividends till such time as they are converted. Some proxy / indexed type of adjustments are envisaged in these cases.  Further, warrants have a problem of ‘roll ability' as they are to be converted on the stipulated date. The share route has meant funding the trust to enable it to subscribe to the preferential allotment made by the company.

 

In either case, typically, a Trust is formed under the Indian Trust Act with:

 

• The company as the settler and
• Independent trustees.

 

Depending on the intended beneficiaries and volumes of allotment along with the time horizon, the financial needs of the Trust will be determined for administering the plan.  Though a company may give soft loans from its own funds to meet the entire requirement of the Trust, under some conditions, there are possible advantages of the Trust raising loans through other sources with the support of the company (company's guarantee or back-to-back arrangements or a combination).

What role does the Trust play

 

 

• The Trust would typically make an offer to the employee concerned giving him/ her time for accepting the same.  Some schemes provide for exercise of the option within the stipulated exercise period (which could be a few months to two years or so).
• The Trust may have the provision for collecting part of the amount due on acceptance of offer. 
• The earmarked or allotted shares / warrants will be held by the Trust in the beneficial interest of the employee concerned.

 

There is a lock-in period of 3 to 5 years with the provision that if the employee separates from the service of the company (except in the case of death, medically certified disability or other discretionary conditions) the shares / warrants would be forfeited and reverted to the Trust.  As the shares are not physically transferred to the employee, there is no stamp duty at this stage. Even where the warrants / shares have been transferred in the name of the employee on exercise of option (which could be earlier than the lock-in), there could be a separate agreement / documentation to ensure that the lock-in period is fulfilled.