The Securities and Exchange Board of India (“SEBI“), vide its notification dated August 13, 2021, introduced the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“2021 Regulations“)1. This was after an expert group, constituted to merge the SEBI (Share Based Employee Benefits) Regulations, 2014 and the SEBI (Issue of Sweat Equity) Regulations, 2002 into the 2021 Regulations recommended various changes to the earlier regulations2.
As the application of the 2021 Regulations is restricted to companies listed on a recognised Indian stock exchange, unlisted companies continue to be regulated under the Companies Act, 2013 (“Act“). The 2021 Regulations apply to companies seeking to issue sweat equity shares or having a scheme which is set up/funded/guaranteed/controlled/managed by the company or any other company in its group that: (a) affords a direct/indirect benefit to its employees; and (b) involves the direct/indirect purchase/subscription of the securities of the company3.
The 2021 Regulations have a wide scope of application, encompassing a wide range of schemes for companies to choose from4. A brief description of each mechanism available to companies to distribute benefits amongst their employees is as follows:
- Employee Stock Option Schemes (“ESOS”): An ESOS is a scheme by way of which a company grants employees stock options directly (or by way of a trust)5. Such a scheme is required to be accompanied by the disclosures specified in the 2021 Regulations, duly provided to the prospective grantees of the option6. A company making a grant of options pursuant to an ESOS is free to determine the price payable by an employee exercising the said options (conforming to the accounting policies specified in the 2021 Regulations)7. ESOS are required to have a vesting period of at least one year; and an employee granted such an option is not at liberty to exercise the rights and enjoy the benefits available to a regular shareholder until the shares are ultimately issued upon exercise of the option8.
- Employee Stock Purchase Scheme (“ESPS”): An ESPS is a scheme where the company may offer shares to its employees (as part of a public issue or otherwise) or by way of a trust (where the said trust may acquire the shares for the purposes of the scheme)9. The company may determine the price of shares to be issued under an ESPS (conforming to the accounting policies specified in the 2021 Regulations)10. Although the shares issued under an ESPS are also required to be locked in for a minimum period of one year, if the ESPS is part of a public issue of shares (and the employees stand to purchase the shares at the same price as the public issue), the shares issued to the employees pursuant to the ESPS may not be subject to any lock-in11.
- Stock Appreciation Rights Scheme (“SAR Scheme”): SAR Scheme is intended to distribute the benefits of the increase/appreciation in the value of the company’s stock amongst its employees. An employee that is granted a stock appreciation right would be entitled to receive appreciation for a specified number of shares of the company and may receive settlement of such an appreciation by way of cash payments/shares of the company12. However, an employee that holds stock appreciation rights pursuant to such a SAR Scheme does not have the right to enjoy the benefits available to a shareholder in respect of the rights granted to him/her13.
- General Employee Benefits Scheme (“GEBS”): GEBS is a type of scheme of a company that deals in shares of the company (or that of its listed holding company) for the specific purpose of employee welfare (i.e., healthcare benefits, hospital care benefits, benefits in the event of sickness, etc.)14. For the purpose of the GEBS, such shares may not exceed 10% (ten per cent) of the book value/fair value/market value of the total assets of the scheme (whichever is lower), as appearing in its latest balance sheet15.
- Retirement Benefit Scheme (“RBS”): RBS is a scheme of a company that deals in shares of the company (or that of its listed holding company) established for the purpose of providing retirement benefits to the employees (harmonized with the retirement benefits based on the prevailing laws in India)16. For the purposes of the RBS, such shares may not exceed 10% (ten per cent) of the book value/fair value/market value of the total assets of the scheme (whichever is lower), as appearing in its latest balance sheet17.
- Sweat Equity Shares: Sweat Equity Shares are equity shares of a company, issued at a discount/for consideration (other than cash) that may be given to employees for providing their know-how or adding sizeable value to the company18. Such shares are required to be issued to employees pursuant to Section 54 of the Act. However, a company may only issue sweat equity shares for up to 15% (fifteen per cent) of the existing yearly paid up equity share capital; and the issuance of sweat equity shares in the company shall not exceed 25% (twenty-five per cent) of the paid-up equity share capital of the company at any time19.
The 2021 Regulations, significantly streamlined by the report of the expert group, continues to be a robust foundation for equity-linked benefits provided to employees by companies, over and above their remuneration. The various options underlined above afford companies the option to curate the benefits provided to their employees in line with their commercial objectives and encourage value addition in a manner diverse enough to suit the ever-changing requirements of India Inc.
3 Regulation 1(4) of the 2021 Regulations.
4 Regulation 1(3) of the 2021 Regulations.
5 Regulation 2(1)(j) of the 2021 Regulations.
6 Regulation 16 of the 2021 Regulations.
7 Regulation 18 of the 2021 Regulations.
8 Regulation 19 of the 2021 Regulations.
9 Regulation 2(1)(k) of the 2021 Regulations.
10 Regulation 22(1) of the 2021 Regulations.
11 Regulation 22 of the 2021 Regulations.
12 Regulation 2(1)(qq) of the 2021 Regulations.
13 Regulation 25 of the 2021 Regulations.
14 Regulation 2(1)(o) of the 2021 Regulations.
15 Regulation 26 of the 2021 Regulations.
16 Regulation 2(1)(ii) of the 2021 Regulations.
17 Regulation 27 of the 2021 Regulations.
18 Regulation 2(88) of the Act.
19 Regulation 31 of the 2021 Regulations.