Unit-Based Employee Benefit Schemes: Benefits and Recent Updates

Posted On - 7 December, 2024 • By - Rohitaashv Sinha

Introduction

The Indian financial landscape has witnessed a recent innovation in employee compensation. Unit-Based Employee Benefit Schemes (UBEBS) have emerged as a novel approach for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) to reward and incentivize their employees. This scheme, introduced by the Securities and Exchange Board of India (SEBI), allows companies to grant employees “unit options,” similar to stock options, giving them the right to purchase units of the REIT or InvIT at a predetermined price.

What is a Unit-Based Employee Benefits Scheme?

A UBEBS is a unique compensation strategy designed specifically for employees of REITs and InvITs. This scheme allows companies to grant employees “unit options,” similar to stock options, which give employees the right to purchase units of the REIT or InvIT at a predetermined price within a specific timeframe. SEBI introduced a framework for UBEBS via amendments on July 13, 2024.

How Does UBEBS Work?

  • Trust Establishment: The company establishes a special employee benefit trust to hold and manage the units.
  • Unit Acquisition: The trust acquires units through various methods:
  • Management Fees: A portion of the management fees can be received in units.
  • Shareholder Transfers: Shareholders can transfer units to the trust.
  • Direct Transfers: The company can directly transfer units to the trust.
  • Unit Allocation: The trust allocates units to employees based on the terms of the scheme.
  • Vesting Period: Units are typically subject to a vesting period, meaning employees must wait a certain amount of time before they can exercise their options.
  • Exercise of Options: Once the vesting period ends, employees can exercise their options and purchase the units at the predetermined price.

Regulatory Framework

SEBI has established a comprehensive regulatory framework for UBEBS, which includes:

  • Trust Structure: The trust deed must comply with specific provisions.
  • Unit Acquisition: There are limitations on secondary market purchases.
  • Disclosure Requirements: The company must disclose details of the scheme to unit holders and employees.
  • Vesting and Exercise Periods: The scheme must specify the vesting period and exercise price.
  • Accounting Standards: The company must follow specific accounting standards.

Benefits for Employees and Companies

Benefits for Employees

  • Long-Term Financial Gains: As the value of the REIT or InvIT increases, so does the potential value of the employee’s units.
  • Ownership Stake: Employees become partial owners of the company, fostering a sense of ownership and pride.
  • Tax Benefits: In certain jurisdictions, there may be tax advantages associated with UBEBS.
  • Retirement Planning: UBEBS can serve as a valuable tool for long-term financial planning and retirement savings.

Benefits for Companies

  • Attracting and Retaining Talent: UBEBS can be a powerful tool for attracting and retaining top talent, especially in competitive industries.
  • Aligning Interests: By granting employees ownership stakes, companies can align employee interests with shareholder interests, fostering a culture of ownership and accountability.
  • Improved Employee Morale and Productivity: Employees who feel invested in the company’s success are more likely to be motivated and productive.
  • Cost-Effective Compensation: UBEBS can be a cost-effective way to compensate employees, particularly when compared to traditional cash bonuses or stock options.

Recent SEBI Update: Streamlining the Process

Context and Purpose

  • Issued by SEBI: This circular focuses on provisions under the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations”). All provisions outlined in the circular are applicable immediately.
  • Objective:
    • Provide relaxations for units allotted to Employee Benefit Trusts (EBTs) under UBEBS.
    • Ensure uniformity in reporting formats for quarterly compliance by InvITs.
    • Align timelines for distributions by InvITs with amended regulations.

Relaxation for Units Allotted to Employee Benefit Trusts (EBTs)

Existing Restrictions in Chapter 7 of InvIT Master Circular (May 15, 2024)

  • Lock-in:
    • Units allotted to non-sponsors: Locked in for 1-year post-trading approval.
    • Pre-preferential holding of allottees: Locked in for 6 months post-trading approval.
  • Allotment Restrictions:
    • Preferential issue prohibited if:
      • Allottees transferred units within 90 trading days before the relevant date.
      • Sponsors sold/transferred units within the same period (subject to some exceptions).

Relaxation Provided

  • SEBI relaxed lock-in and allotment restrictions for units allotted to EBTs under UBEBS to facilitate easier unit allocation and transfer.
  • Amendments to Master Circular:
    • Lock-in: Lock-in provisions are not applicable to EBTs holding units under a UBEB scheme compliant with Chapter IVB of InvIT Regulations.
    • Allotment: Allotment restrictions do not apply to EBTs under UBEB schemes in compliance with Chapter IVB of InvIT Regulations.

Format of Quarterly Report and Compliance Certificate

Regulatory Requirements

  • Under Regulation 9(3): The trustee must oversee the investment manager’s activities and obtain a quarterly compliance certificate from the investment manager.
  • Under Regulation 10(18)(a): Investment manager must submit quarterly reports covering:
    • Receipts and payments. 
    • Compliance with regulations.
    • Status of under-construction projects, etc.

New Provision for Standardization

Bharat InvITs Association (BIA), in consultation with SEBI:

  • Will specify a uniform format for:
    • Quarterly reports by investment managers.
    • Compliance certificates submitted to trustees.
  • BIA will publish the format on its website.
  • Future changes to the format require SEBI consultation.

Mandatory Compliance

All InvITs must adopt this uniform format to ensure compliance with Regulations 9(3) and 10(18)(a).

Alignment of Timelines for Distributions by InvITs

Regulatory Amendments (September 27, 2024)

  • SEBI amended timelines for InvIT distributions, effective from November 27, 2024.
  • Changes address procedural frameworks for handling unclaimed amounts.

Modifications to Master Circular

  • Para 23.2 of Chapter 23 (Handling Unclaimed Amounts):
  • Highlights cases of unclaimed/unpaid distributions due to unitholder account issues.
  • Aligns distribution timelines with amended Regulation 18(6)(c).
  • Annexure 16, Clause A(1), Part I (Unclaimed Amounts) – Unpaid Distribution Account:
  • Unclaimed distribution amounts must be transferred to a separate Escrow Account within 7 working days of the expiry of the specified distribution timeline.
  • This account will be termed the Unpaid Distribution Account.

Conclusion and The Way Forward

UBEBS offers a dynamic approach to enhancing employee compensation in REITs and InvITs. By introducing unit options, these schemes align employee and organizational interests, promoting engagement and productivity. Recent SEBI updates have further simplified the implementation process, ensuring greater flexibility and transparency for companies and employees alike.

Going forward, it will be essential for organizations to fully understand and adapt to the regulatory adjustments, particularly in areas like compliance reporting and distribution timelines. By doing so, companies can effectively integrate UBEBS into their operations, unlocking long-term benefits for all stakeholders. Emphasizing consistent communication and education about these schemes will be crucial in maximizing their potential and establishing them as a cornerstone of employee benefits in the sector.

King Stubb & Kasiva,
Advocates & Attorneys

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