Last year, the Securities and Exchange Board of India (“SEBI”) issued a guidance note clarifying certain matters regarding employee stock option plans (ESOPs) and their implications under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (the “Insider Trading Regulations”). Specifically, it stated that the “contra-trade” restrictions do not apply to the exercise of stock options by employees and the sale of resultant shares by them within a six-month period. This and related issues arose for consideration in an informal guidance request by KPIT Technologies Limited (“KPIT”). Apart from the issues related to the aforesaid guidance note, specific concerns arose as KPIT has established and implemented a cashless ESOP. Under this, the KPIT Employee Welfare Trust (the “Trust”) was established to subscribe to or purchase shares of the company. Each time an employee exercised an option, the Trust would sell shares of the company and pay the employee the difference between the market price of the shares and the exercise price of the options. The additional question that arose in KPIT’s request was whether the Trust itself would be subject to the contra-trade restrictions as it would be buying and selling shares with a six-month period as part of its operations relating to the implementation of KPIT’s ESOP. KPIT’s request stated that the Trust was carrying out these functions not for itself, but for the benefit of the employees, and hence whether the contra-trade restrictions in the Insider Trading Regulations would apply to the activities of the Trust.In its informal guidance letter, SEBI provided favourable clarification on both counts, which permits the implementation of a cashless exercise of stock options by employees through the trust mechanism without violating the contra-trade restrictions imposed by the Insider Trading Regulations. On the question of the employees exercising the stock options, which results in a sale of the shares, SEBI drew attention to the guidance note where it has provided an illustration “that if a designated person has sold/purchased shares, he can subscribe and exercise ESOPs at any time after such sale/purchase, without attracting contra trading restrictions”. Similarly, the sale of shares after exercise of ESOPs will also not attract the contra trading restrictions.More importantly, SEBI clarified the role of the Trust, in that it is not acting in its own capacity by rather on behalf of the employees to give effect to the exercise of ESOPs.Hence, its acquisition of shares and subsequent sale to give effect to the exercise of the stock options by employees will not be considered a contra trade.In all, through the guidance note and now the informal guidance issued to KPIT, SEBI has been ironing out some of the practical issues that have arise in the implementation of the Insider Trading Regulations. Note: Technically, the Trust is not acting “on behalf of” the employees as it is not in any agency capacity, but rather “for the benefit of” the employees who are the beneficiaries. But, such a technical distinction should not alter the outcome of the question pertaining to ESOPs and the Insider Trading Regulations.