SCHEMES UNDER SECURITIES AND EXCHANGE BOARD OF INDIA (SHARE BASED EMPLOYEE BENEFITS AND SWEAT EQUITY) REGULATIONS, 2021

[Mr. M. GOVINDARAJAN]

Introduction

The Securities and Exchange Board of India (‘SEBI’ for short) has notified the Securities and Exchange Board of India (Share based Employee Benefits and Sweat Equity) Regulations, 2021, vide Notification No. SEBI/LAD-NRO/GN/2021/40, dated 13.08.2021 which came into effect from 13.08.2021. These regulations have merged the erstwhile SEBI (Issue of Sweat Equity) Regulations, 2002 and SEBI (Share Based Employee Benefits) Regulations, 2014 into a single Regulation.

Applicability

These regulations shall apply to the following-

• employee stock option schemes;
• employee stock purchase schemes;
• stock appreciation rights schemes;
• general employee benefits schemes;
• retirement benefit schemes.

These regulations shall apply to any company whose equity shares are listed on a recognized stock exchange in India-

• for direct or indirect benefit of employees;
• involving dealing in or subscribing to or purchasing securities of the company, directly or indirectly; and
• satisfying, directly or indirectly, any one of the following conditions -

• the scheme is set up by the company or any other company in its group.
•  the scheme is funded or guaranteed by the company or any other company in its group.
•  the scheme is controlled or managed by the company or any other company in its group.

Scheme

The term ‘Scheme’ is defined under Regulation 2(1) (ll) as a  scheme  of  a  company  proposing  to  provide  share  based  benefits  to  its employees which may be implemented and administered directly by such company or through a trust, in accordance with these regulations.

A company may implement a scheme(s) either directly or by setting up an irrevocable trust(s).  An employee shall be eligible to participate in the schemes of the company as determined by the compensation committee which may be constituted for administration and superintendence of the schemes.    Where the scheme is being implemented through a trust the compensation committee shall delegate the administration of such scheme(s) to the trust.

No scheme shall be offered to employees of a company unless the shareholders of the company approve it by passing a special resolution in the general meeting.   A company may by special resolution of its shareholders vary the terms of the schemes offered pursuant to an earlier resolution of the general body but not yet exercised by the employees, if such variation is not prejudicial to the interests of the employees.

The benefit granted to an employee under the regulations shall not be transferable to any person.  The same shall not be pledged, hypothecated, mortgaged or otherwise alienated in any other manner.

Employee Stock Option Scheme

The expression ‘Employee Stock Option Scheme’ (‘ESOS’ for short) is defined under Regulation 2(1) (j) as a scheme under which a company grants employee stock options to employees directly or through a trust.

Implementation

An ESOS shall contain the details of the manner in which the scheme will be implemented and operated.  No ESOS shall be offered unless the disclosures, as specified below are made by the company to the prospective option grantees.-

•  General information on all schemes-

• Name of the Trust;
• Details of the Trustee(s);
• Amount of loan disbursed by company / any company in the group, during the year;
• Amount of loan outstanding (repayable to company / any company in the group) as at the end of the year;
• Amount of loan, if any, taken from any other source for which company / any company in the group has provided any security or guarantee
• Any other contribution made to the Trust during the year

• Brief details of transactions in shares by the Trust-

• Number of shares held at the beginning of the year;
• Number of shares acquired during the year through (i) primary issuance (ii) secondary acquisition, also as a percentage of paid up equity capital as at the end of the previous financial year, along with information on weighted average cost of acquisition per share;
•  Number of shares transferred to the employees / sold along with the purpose thereof;
•  Number of shares transferred to the employees / sold along with the purpose thereof;

• In case of secondary acquisition of shares*  by the Trust-

• Held at the beginning of the year;
• Acquired during the year;
• Sold during the year;
• Transferred to the employees during the year
• Held at the end of the year

*As a percentage of paid-up equity capital as at the end of the year immediately preceding the year in which shareholders' approval was obtained.

Pricing

The company granting options to its employees pursuant to an ESOS shall be free to determine the exercise price subject to conforming to the accounting policies.

Vesting period

The vesting period of this scheme is one year.  In case where options are granted by a company under an ESOS in lieu of options held by an employee under an ESOS in another company which has merged, demerged, arranged or amalgamated with the first mentioned company, the period during which the options granted by the transferor company were held by such employee shall be adjusted against the minimum vesting period.   In the event of death or permanent incapacity of an employee, the minimum vesting period of one year shall not be applicable and in such instances, all the options, SAR or any other benefit granted under a scheme to him/her till his/her death shall vest, with effect from the date of his/her death, in the legal heirs or nominees of the deceased employee.

The company may specify the lock-in period for the shares issued pursuant to exercise of an option.

Rights of the option holder

An employee shall not have the right to receive any dividend or to vote or in any manner enjoy the benefits available to a shareholder in respect of an option granted to him/her, till shares are issued to him/her upon exercise of the option.

Failure to opt

If there is a failure to exercise an option the amount paid by the employee, if any, at the time of grant, vesting or exercise of option-

•  may be forfeited by the company if the option is not exercised by the employee within the exercise period; or
• may be refunded to the employee if the options are not vested due to non-fulfillment of conditions relating to vesting of option as per the ESOS.

Employee Stock Purchase Scheme

The expression ‘Employee Stock Purchase Scheme’ (ESPS’ for short) is defined under Regulation 2(1)(k) as a scheme under which a company offers shares to employees, as part of public issue or otherwise, or through a trust where the trust may undertake secondary acquisition for the purposes of the scheme.

Price

 A company may determine the price of shares to be issued under this scheme, subject to conforming to the accounting policies. 

Lock in period

The lock in period is one year from the date of allotment.   In case where shares are allotted by a company under this scheme in lieu of shares acquired by the employee under an ESPS in another company which has merged or amalgamated with the first mentioned company, the lock-in period already undergone in respect of shares of the transferor company shall be adjusted against the lock-in period.   In the event of death or permanent incapacity of an employee, the requirement of lock-in shall not be applicable from the date of death or permanent incapacity.

If ESPS is part of a public issue and the shares are issued to employees at the same price as in the public issue, the shares issued to employees pursuant to ESPS shall not be subject to any lock-in period.

Stock Appreciation Rights Scheme

The expression ‘Stock Appreciation Rights Scheme’ (‘SAR Scheme’ for short) is defined under Regulation 2(1)(rr) as a scheme under which a company grants SAR to employees.  The expression ‘Stock Appreciation Right’ (‘SAR’ for short) is defined under Regulation 2(1)(qq) as a right given to a SAR grantee entitling him to receive appreciation for a specified number of shares of the company where the settlement of such appreciation may be made by way of cash payment or shares of the company.

A SAR settled by way of shares of the company shall be referred to as equity settled SAR.  Any reference to stock appreciation right or SAR shall mean equity settled SARs and does not include any scheme which does not, directly or indirectly, involve dealing in or subscribing to or purchasing, securities of the company.

A company shall be free to implement cash settled or equity settled SAR scheme.   in case of equity settled SAR scheme, if the settlement results in fractional shares, then the consideration for fractional shares should be settled in cash.

No SAR shall be offered under any SAR scheme unless the disclosures as detailed below, are made by the company to the prospective SAR grantees-

• General information on all schemes-

• Name of the Trust;
• Details of the Trustee(s);
• Amount of loan disbursed by company / any company in the group, during the year;
• Amount of loan outstanding (repayable to company / any company in the group) as at the end of the year;
• Amount of loan, if any, taken from any other source for which company / any company in the group has provided any security or guarantee
• Any other contribution made to the Trust during the year

• Brief details of transactions in shares by the Trust-

• Number of shares held at the beginning of the year;
• Number of shares acquired during the year through (i) primary issuance (ii) secondary acquisition, also as a percentage of paid up equity capital as at the end of the previous financial year, along with information on weighted average cost of acquisition per share;
•  Number of shares transferred to the employees / sold along with the purpose thereof;
•  Number of shares transferred to the employees / sold along with the purpose thereof;

• In case of secondary acquisition of shares*  by the Trust-

• Held at the beginning of the year;
• Acquired during the year;
• Sold during the year;
• Transferred to the employees during the year
• Held at the end of the year

*As a percentage of paid-up equity capital as at the end of the year immediately preceding the year in which shareholders' approval was obtained.

Vesting period

The minimum vesting period of this scheme is one year.  n a case where SAR is granted by a company under a SAR scheme in lieu of SAR held by the employee under a SAR scheme in another company which has merged or amalgamated with the first mentioned company, the period during which the SAR granted by the transferor company were held by the employee shall be adjusted against the minimum vesting period.    In the event of death or permanent incapacity, the minimum vesting period of one year shall not be applicable and in such instances, the options shall vest on the date of death or permanent incapacity.

Rights of SAR holder

The employee holding a SAR shall not have the right to receive dividend or to vote or in any manner enjoy the benefits available to a shareholder in respect of a SAR granted to him/her.

General Employee Benefits Scheme

The expression ‘General Employee Benefits Scheme’ (‘GEBS’ for short) is defined under Regulation 2(1)(o) as  any scheme of a company framed in accordance with these regulations, dealing in shares of the company or the shares of its listed holding company, for the purpose of employee welfare including healthcare benefits, hospital care or benefits, or benefits in the event of sickness, accident, disability, death or scholarship funds, or such other benefit as specified by such company.

Implementation

The shares of the company or shares of its listed holding company shall not exceed 10% of the book value or market value or fair value of the total assets of the scheme, whichever is lower, as appearing in its latest balance sheet (whether audited or limited reviewed) for the purposes of GEBS.   The secretarial auditor of the company shall certify this compliance at the time of adoption of such balance sheet by the company.

Retirement Benefit Scheme

The expression ‘Retirement Benefit Scheme’ (‘RBS’ for short) is defined under Regulation 2(1)(ii) as a scheme of a company framed in accordance with these regulations, dealing in shares of the company or the shares of its listed holding company, for providing retirement benefits to the employees subject to compliance with existing rules and regulations as applicable under laws relevant to retirement benefits in India.

Implementation

This scheme may be implemented by a company subject to compliance with these regulations and provisions of any other law in force in relation to retirement benefits.  The shares of the company or shares of its listed holding company shall not exceed 10% of the book value or market value or fair value of the total assets of the scheme, whichever is lower, as appearing in its latest balance sheet (whether audited or limited reviewed) for the purposes of RBS.   The secretarial auditor of the company shall certify this compliance at the time of adoption of such balance sheet by the company.