Unified Framework by SEBI for Share-based Employee Benefits and Sweat Equity Shares: Understanding the Key Changes

By Neha Sinha & Radhika Malpani

November 30, 2021

The Securities and Exchange Board of India (SEBI)constituted an Expert Group in October 2020 to revisit and recommend policy changes to the existing frameworkfor share-based employee benefits and sweat equity shares under the SEBI (Share Based Employee Benefits) Regulations, 2014 (the ‘SBEB Regulations’) and the SEBI (Issue of Sweat Equity) Regulations, 2002 (the ‘SE Regulations’) (collectively, the ‘Erstwhile Regulations’). Based on the recommendations received, SEBI issued the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (the ‘New Regulations’), which came into force with effect from 13 August 2021. 

The changes introduced by the New Regulations are primarily aimed at making the framework more employee-friendly, while allowing listed companies the flexibility to design share-based employee benefit (‘SBEB’) plans that are best suited to their specific needs. The key changes introduced by the New Regulations are discussed below.

Changes impacting the employees and grantees:

The New Regulations seek to establish a framework that will allow a larger number of employees to participate in a company’s growth story and for a longer period of time. A multi-pronged approach, as detailed below, has been used to achieve this goal.

In the case of SBEB plans, any employee designated by the company and working exclusively for the company is eligible to participate in its SBEB plan. Additionally, it has been specified that a non-executive director, who is not a promoter or part of the promoter group is eligible to participate in SBEB plans.

Furthermore, under the SBEB Regulations only employees of subsidiaries and holding companywere eligible to participate in an SBEB plan of a listed company (a ‘Granting Company’). Under the New Regulations, employees of associate companies are also eligible to participate in a Granting Company’s SBEB plan.

Unlike under the previous regime, listed companies can now establish common employee benefit plans for employees across all its group companies, as opposed to only its holding company and subsidiaries.

These relaxations have been codified in the New Regulations. Furthermore, the New Regulations provide for suspension of the minimum lock-in period mandated for employee stock purchase plans in the event of an employee’s death or permanent incapacitation.

SEBI issued an informal guidance to Way to Wealth Brokers Pvt. Ltd. in July 2020, observing that a company may allow its empaneled stockbrokers to fund the payment of exercise price, to be adjusted against the sale proceeds of the shares. However, there was ambiguity regarding the application of funds for the payment of tax payable upon exercise of options and other related expenses.

The New Regulations have paved the way to enable ‘an employee to fund the payment of the exercise price, the tax obligations arising from such exercise and other related expenses’, by replacing the term ‘cashless exercise’ with suchdetailed explanation.

Furthermore, the New Regulations permit the implementingtrustee, in addition to the Granting Company and empaneled stockbrokers, to fund such exercise.

Changes relating to the implementation of schemes:

The New Regulations also include a number of provisionsthat allow for operational flexibility in implementation of SBEB plans while balancing the interests of the shareholders and grantees.

However, unlike the SBEB Regulations, the New Regulations require that any significant changes to the terms of an SBEB plan, as listed below, be approved by a special resolution rather than ordinary resolution of the shareholders:(i) changes to the terms of an SBEB plan offered to employees that has not yet been exercised; (ii) repricing of options, SARs, or shares that have not yet been exercised, whether vested or not, in the event that the scheme has become unattractive due to a devaluation of the shares; and (iii) changes in price, vesting period, or maturity in terms of a pre-IPO scheme.

Conclusion

Share-based incentive plans and sweat equity shares are excellent ways to integrate employees into the growth story of a company. As more and more new-age companies are getting listed on Indian stock exchanges, it was incumbenton SEBI to revisit the rules governing share-based incentives for employees.

While the New Regulations have not significantly altered the regulatory landscape for employee benefit schemes and sweat equity shares, they have brought a lot of clarity to various aspects of such share based incentives. The New Regulations are better suited to the needs of modern businesses and their employees.

In light of operational flexibility introduced under the New Regulations,new rules relating to vesting and exercise of options, revised criteria for appointment of trustees, as well as changes to compliance requirements, it is important for listed companies to examine their share based employee plans and sweat equity share plans to bring them in line with the New Regulations.

Neha Sinha is Partner, L&L Partners

Radhika Malpani is Associate, L&L Partners

Disclaimer: The views or opinions expressed are solely of the author.