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Wednesday, September 22, 2021

Explained: How new SEBI regulations benefit listed company employees

The new regulations have widened the scope of employees who can be offered stock options, and brought in other key changes that will benefit the employees and listed companies issuing these options.

Written by Sandeep Singh , Edited by Explained Desk | New Delhi |
Updated: August 29, 2021 10:05:08 pm
The logo of the Securities and Exchange Board of India is seen on the facade of its headquarters building in Mumbai. (Reuters Photo/File)

Earlier this month, the Securities and Exchange Board of India approved the merger of the SEBI (Share Based Employee Benefits) Regulations, 2014 (SBEB Regulations) and the SEBI (Issue of Sweat Equity) Regulations, 2002 (Sweat Equity Regulations) into the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. The new regulations have widened the scope of employees who can be offered stock options, and brought in other key changes that will benefit the employees and listed companies issuing these options.

What are the key changes?

Companies will now be allowed to provide share-based employee benefits to employees, who are exclusively working for such a company or any of its group companies including a subsidiary or an associate. Under the earlier regulations, only permanent employees of the company and its holding and subsidiary companies were eligible for share-based benefits; the new regulations broaden this by deleting the word “permanent” and also permitting employees of group/associate companies. Experts say this will not only help companies to better use share-based employee benefits for retaining employees for longer period, but also imbibe a sense of responsibility and ownership in the employee that will push him/her to work for the growth of the company.

Are the new rules applicable to all companies?

No, these will be applicable only to listed companies as these have been framed by SEBI, which only regulates listed companies. For unlisted companies, any change needed will have to be brought into the Companies Act 2013, by the Ministry of Corporate Affairs.

What are the other important changes?

To provide immediate relief to an employee or his/her family in instances of permanent incapacity or death, the regulations have dispensed with the requirement of a minimum vesting period and lock-in period (minimum 1 year) for all share benefit schemes. Experts feel this will allow companies to provide instant relief to bereaved family members who otherwise would have had to wait.

The new regulations have extended the time period for appropriating the unappropriated inventory of shares held by the trust from the existing one year to two years, subject to the approval of the Compensation Committee/ Nomination and Remuneration Committee. This is expected to provide relief to companies that could not grant or dispose of such excess inventory due to adverse market conditions.

The regulations now also permit companies to transfer excess shares or monies held by a trust upon its winding up, to other share-based employee benefit schemes, subject to approval of the shareholders for such transfer. This measure will give more clarity to companies to manage their assets and financial resources of the trust in a more efficient and organised manner.

The regulations will now provide companies with flexibility in switching administration of their schemes from the trust route to the direct route, or vice versa, with the approval of the shareholders, subject to the condition that the switch is not prejudicial to the interest of the employees. Earlier, companies that opted for any of these routes had to carry on with that route until the conclusion of the scheme. As there are some practical challenges in either of the routes, switching will provide flexibility to overcome the respective challenges.

When will sweat equity get issued?

Sweat equity shares will be allowed to be issued for providing the know-how or making available rights in the nature of intellectual property rights or value additions.

As per Section 2(88) of the Companies Act, 2013 “sweat equity shares” means such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

The regulations have aligned the pricing and the lock-in requirements of the sweat equity shares with the preferential issue norms as provided in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

The maximum yearly limit of sweat equity shares that can be issued by a company listed on the main board has been prescribed at 15% of the existing paid-up equity share capital within the overall limit, not exceeding 25% of the paid-up capital at any time.

Further, in case of companies listed on the Innovators Growth Platform (IGP), the yearly limit will be 15% and overall limit will be 50% of the paid-up capital at any time. This enhanced overall limit for IGP will be applicable for 10 years from the date of the company’s incorporation. This proposal will benefit all new start-up companies seeking listing on the IGP platform.

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