Reviewed and Validated by: Pushkar, Founder & Managing Partner
We are writing this article to give a clear understanding to the reader or its officials (reader) who has adopted an employee stock purchase / option scheme. The scheme is administered by a trust established by way of execution of a deed between the settlor and the trustees, pursuant to which the trust was created to hold the property of the trust for the benefit of the employees covered under the scheme. In the above context, the reader wishes to explore the appointment of certain classes of persons as trustees, and seeks clarity on the applicable law in such regard.
1. Are there any prescribed criteria for determining the “independence” of a trustee under any law?
(a) The appointment of trustees to the trust for the purpose of administration of the scheme is governed by the relevant provisions of the Companies Act, 2013, and the Indian Trusts Act, 1882.
(b) Per Section 10 of the Trusts Act, every person capable of holding property may be a trustee. In the event that the trust involves the exercise of discretion, the concerned person must be competent to contract, and therefore, must not be disqualified by virtue of any law.
Further, Section 17 of the Trusts Act requires a trustee to be impartial and not execute the trust for the advantage of one at the expense of another, with a beneficiary possessing the right, subject to the provisions of the instrument of trust, under Section 60 of the Trusts Act, that the trust property be properly protected and held and administered by proper persons.
(c) Section 67(2) of the Companies Act, 2013 states that no public company shall give any financial assistance in respect of a purchase or subscription made or to be made, by any person of or for any shares in the company or in its holding company, other than where such financial assistance is in accordance with the requirements imposed by Section 67(3)(b) of the Companies Act.
(d) By way of summary, Section 67(3)(b) states that the restriction under Section 67(2) of the Companies Act will not apply in respect of the provision by a company of money in accordance with the Companies (Share Capital and Debentures) Rules, 2014, for purchase / subscription of shares in the company or its holding company, if such purchase / subscription is for the shares held by trustees for the benefit of its employees or such shares held by the employees of the company.
(e) In respect of a trust as contemplated under Section 67(3) of the Companies Act, Rule 16(3) of the SCD Rules states that a person shall not be appointed as a trustee to hold shares if such person:
(i) is a director, key managerial personnel or promoter of the company or its holding, subsidiary or associate company or any relative of such director, key managerial personnel or promoter; or
(ii) beneficially holds 10% or more of the paid-up share capital of the company.
(f) It may be noted that the disqualifications for appointment of trustees noted under the SCD Rules are also reiterated under the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014.
In the absence of any specific law on the independence / probity of trustees of an employee benefit trust, guidance may be sought from the SEBI Regulations and the Discussion Paper on “Review of guidelines governing stock related employee benefit schemes” issued by SEBI prior to promulgation of the SEBI Regulations.
The Discussion Paper noted that “it is important to ensure and demonstrate independency in the administration and governance of the Trust. Independent Trustee is one mechanism of ensuring the same.” Further, the following classes of persons were considered / recommended as independent trustees under the Discussion Paper:
(i) an independent non-executive director of the company;
(ii) a professional familiar with employee welfare;
(iii) a professional familiar with operation of the stock markets; and
(iv) a professional trustee company.
Accordingly, while “independence” is in itself not explicitly stated as part of the eligibility criteria that would be applicable in respect of a trustee of the trust, such inference could potentially be drawn in the context of the specific duties of the trustees as read with the above-highlighted provisions under the Companies Act and the Trusts Act.
Further, it may be noted that “independence” as contemplated under the Companies Act in relation to independent directors requires, inter alia, that such directors be persons of integrity and possessing the relevant expertise and experience; that they not be related to the promoters of the company, or its holding / subsidiary / associate company; and that neither they nor their relatives have a pecuniary or beneficial relationship with the company within the contours specified under the Companies Act.
Accordingly, the appointment of trustees and any action undertaken in respect of the trust must be examined on a case-by-case basis from the perspective of whether it accounts for probity of the persons contemplated to be appointed as trustees, and whether it is potentially detrimental or could be perceived to be detrimental to the interests of the beneficiaries of the trust.
2. Can an employee of the reader or that of its holding company, subsidiary or associate company; an employee or an ex-employee who is holding shares under the scheme; or a former director of the holding company, subsidiary or associate company, who satisfy the criteria under the Companies Act and the SCD Rules, be appointed as a trustee and be treated as “independent” in letter and in spirit?
As stated above, Rule 16(3) of the SCD Rules provides specific classes of persons that are barred from appointment as trustees for a trust as contemplated under Section 67 of the Companies Act. The Companies Act and the SCD Rules do not specifically detail any other qualifications for persons to be appointed as trustees of such trust.
Accordingly, in the absence of any other qualifying criteria, subject to the general duties imposed under the Trusts Act as detailed above, there is no direct bar on the appointment of:
(i) an employee of the reader or that of its holding, subsidiary or associate company;
(ii) an employee or an ex-employee who is holding shares under the scheme; or
(iii) a former director of the holding company, subsidiary or associate company as a trustee, provided that such persons are not disqualified under Rule 16(3) of the SCD Rules.
However, such appointment shall nonetheless be subject to the concerned persons being able to exercise their duties in an independent and impartial manner as required under Section 17 of the Trusts Act. Further, please note that due to such requirement of impartiality and independence under the Trusts Act and to avoid any conflicts of interest, it is recommended that employees / ex-employees of the reader who are also beneficiaries of the trust not be appointed as trustees. Further, the rights of the beneficiaries of the trust under Section 60 of the Trusts Act, that the trust property be properly protected and held and administered by proper persons, must not be prejudiced by such appointment. Ensuring that these requirements are met may entail a fact-based determination of the antecedents and dispositions of the proposed trustees.
Such appointment is additionally subject to any specific stipulations under the trust deed of the trust.
3. Can the settlor be appointed as a trustee and be treated as “independent”?
There is no bar under the Trusts Act or the Companies Act in respect of a settlor / owner being appointed as a trustee of a trust. We are further given to understand that the concerned settlor is not a director serving on the board of directors of the reader or its holding, subsidiary or associate company, and is therefore not barred from appointment by virtue of Rule 16(3) of the SCD Rules.
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4. Can the Chief Human Resources Officer of the reader be appointed as a trustee and be treated as “independent” in letter and in spirit, given that ESOP-related matters are also handled by the HR Department?
In addition to the general stipulations pertaining to protection of the interests of the beneficiaries of a trust noted above, the SCD Rules bar the appointment of key managerial personnel as a trustee. Per the Companies Act, key managerial personnel includes an officer, not more than one level below the directors who is in whole-time employment, and is designated as a key managerial personnel by the board of directors.
We understand that the Chief Human Resources Officer has not been designated as a key managerial personnel by the board of directors of the reader. Accordingly, subject to the requirements under the Trusts Act viz. impartiality of a trustee and proper administration of trust property, there is no bar on the appointment of such Chief Human Resources Officer as a trustee.
III. Qualifications
- This article is for general informational purposes and is not intended to be relied upon as legal advice for any specific transaction, scheme or trust structure.
- The discussion is strictly limited to the matters expressly addressed and is not to be read as an opinion with respect to any other factual or legal matter.
- The specific trust deed, employee benefit scheme, board approvals, shareholder approvals and applicable regulatory filings must be reviewed before taking any final position on the appointment of trustees.
- Any appointment of trustees must be construed in accordance with the laws of India and the applicable regulatory framework in force at the relevant time.
- The views set out above are not binding on any regulatory authority, court or tribunal, and there can be no assurance that a regulatory authority, court or tribunal will not take a different view.
- Any decision taken pursuant to the above should be based on the specific facts, applicable documents and commercial judgment of the concerned company.
- The above is intended only as a general legal discussion on the criteria for determining independence of a trustee under law.
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