CS Mukta Nahata & Sukhpreet Kaur Sodhi
Summary: The Corporate Laws (Amendment) Bill, 2026 would amend section 62(1)(b) of the Companies Act so that it extends to share-linked employee compensation beyond ESOPs, including SARs and RSUs. According to the authors, the companion changes to sections 42 and 68 proceed on the same footing, since each presupposes securities that have actually been issued. Purely cash-settled “phantom stock” therefore remains outside the amended provisions, as it already does under SEBI’s 2021 Regulations. The authors’ principal concern is promoters. Both SEBI’s regulations and Rule 12 exclude promoters from the definition of “employee”, but the exclusion operates only on schemes that those regimes govern. A cash-settled promoter scheme never engages it. SEBI’s 2015 Mindtree guidance illustrates the point: SEBI stated that the regulations “may not apply” and left open whether promoters could be granted such units. Three consequences follow in the authors’ analysis. Recognition extends only to the dilutive, equity-settled form of the instrument. The promoter bar depends on the legal form of an instrument and disregards its economic function. And at the IPO stage, cash-settled schemes receive no express relaxation. The authors recommend that SEBI issue a binding rule on promoter participation, that the ICDR Regulations address the treatment of such schemes at the DRHP stage, and that the MCA state expressly that cash-settled schemes fall outside section 62(1)(b).
Introduction
The Corporate Laws (Amendment) Bill, 2026 (‘Bill’) was introduced in the Lok Sabha on 23 March 2026. A Joint Parliamentary Committee, to which it was referred, presented its report on 3 August 2026. The tracker maintained by PRS Legislative Research records that report as the Bill’s latest stage, and its summary of the report lists no recommendation on the share-linked schemes amendment. Among its many changes, the Bill would give the Companies Act, 2013 (‘Act’) express scope for share-linked employee compensation beyond ESOPs, such as stock appreciation rights (SARs) and restricted stock units.
Commentary has welcomed the change and has noted that cash-settled phantom stock appears to fall outside it. The more consequential question is what that exclusion means for promoters, the one class that the existing framework keeps away from share-based incentives. This blog argues that the promoter bar forms part of the regimes that cash-settled schemes fall outside. By drawing its line at share issuance, the Bill leaves promoter-linked cash-settled incentives without a framework designed for them, leaving them to depend on a 2015 SEBI letter that did not decide the point.
The promoter scheme behind the 2015 guidance
SEBI’s position that cash-settled schemes lie outside its employee-benefit regulations is traced to two informal guidance letters of July 2015, to Saregama India Limited and to Mindtree Limited. Little attention has been paid to the facts of the second. Mindtree had granted notional SAR units to six employees who were also its promoters, entitling them to a cash payment for appreciation over the grant price. SEBI answered that the 2014 Regulations ‘may not apply’ because no actual purchase or sale of shares was involved, and left unanswered the further queries whether such units could be granted to promoters and, in Saregama’s case, to its managing director.
That position is now reflected in the text of the Regulations. The 2021 Regulations confine the term SAR to equity-settled SARs and exclude any scheme that does not involve dealing in, subscribing to or purchasing the company’s securities.1 A SEBI FAQ of 16 November 2021 says the same of phantom stock options. The Regulations also exclude promoters and members of the promoter group from the definition of ‘employee’.2 However, that exclusion operates only on schemes that the Regulations govern. A scheme outside them never engages it, so the Mindtree scheme was resolved without the promoter exclusion being applied.
What the Bill changes, and what it assumes
Clause 28 of the Bill inserts, after ‘under a scheme of employees’ stock option’ in section 62(1)(b), the words ‘or under such other scheme linked to the value of the share capital of the company’.3 Section 62(1) applies where a company seeks to raise its subscribed capital through a further issue of shares, and clause (b) governs the manner in which ‘such shares’ are offered to employees.4 A SAR may be settled in shares or in cash, and only the former involves a further issue.5 The Bill does not define the new category: PRS’s summary says only that such schemes ‘may include’ compensation schemes such as RSUs and SARs, so the text supplies no express boundary.
The companion amendments point the same way. Section 42(2) already excludes employees offered securities under an ESOP from the count of identified persons in a private placement, and the Bill extends that exclusion to the new schemes.6 Section 68 is amended so that the buy-back of ‘securities issued to employees’, the exception to the six-month bar on fresh issue after a buy-back, and the meaning of ‘specified securities’ extend to schemes under section 62(1)(b).7 Each presupposes securities that exist, or options over them. The better reading is that purely cash-settled phantom stock is untouched, as at least one commentator has concluded.
The Bill also leaves one further matter untouched. For section 62(1)(b), ‘employee’ is defined in Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, which excludes employees who are promoters or belong to the promoter group, and directors holding more than ten per cent of the equity.8 The new route is thus available to employees and not to promoters. Commentators describe the amendment as recognising forms of executive compensation, yet a founder-promoter is an executive who does not qualify as an ‘employee’ for this purpose.
Three consequences
First, recognition stops at the dilutive form. Equity-settled SARs are recognised by SEBI’s regulations9 and, if the Bill passes, by the amended Act. Cash-settled schemes, which dilute no one, are expressly excluded from SEBI’s definition of SAR and fall outside the amended Act, so their position rests on that definition, an informal letter and an FAQ.
Second, the promoter bar attaches to the legal form of an instrument and disregards its economic function. A promoter holding notional SAR units receives what an equity-settled SAR would pay, but cash settlement places the instrument outside the reach of both the 2021 Regulations and Rule 12.10 It may be answered that cash settlement leaves shareholding unchanged. That answer is incomplete, because SEBI’s recent enforcement frames the concern differently. In its settlement order of 8 May 2025 concerning One97 Communications Limited, SEBI alleged that the founder had used a transfer of equity to a family trust to avoid classification as a promoter, and contended that he was in a position to influence the committee that approved ESOPs for himself and his brother. The applicants settled without admitting or denying the findings, the ESOPs were cancelled, and the founder was barred from accepting fresh ESOPs from any listed company for three years. The order concerned ESOPs and is not an authority on phantom stock. It does show where the regulator’s concern lies: a promoter’s influence over his own equity-linked pay, which is indifferent to the mode of settlement.
Third, the IPO stage exposes the gap. The 2025 amendments to the ICDR Regulations allow SARs to remain outstanding until the red herring prospectus, but only if granted to employees under a SAR scheme and fully exercised for equity shares before it is filed. They do not address purely cash-settled schemes, and issuers have had to reverse or terminate phantom stock when filing.11 At that stage, unlike equity-settled employee SARs, cash-settled schemes have no express relaxation. A lead manager who is asked whether a promoter’s cash-settled scheme may continue beyond the draft red herring prospectus can point, on the promoter question, only to a 2015 letter that did not decide it.
Objections
Silence may be said to preserve flexibility. That holds for a private company with no listing plans and no promoter recipient, but not where a promoter benefits and an IPO approaches. It may also be said that other provisions apply, such as those on managerial remuneration and related party transactions.12 They may, depending on the company and the recipient, but they regulate remuneration and related party dealings generally and do not resolve whether a promoter may receive a share-linked scheme. Finally, the Mindtree facts may be read as tolerance of promoter grants. SEBI, however, left the promoter queries unanswered, and a decision not to apply a regulation does not amount to approval.
Suggestions and Conclusion
Three steps would close the gap. First, SEBI should convert its informal position into a binding one and decide the question Mindtree left open: whether a promoter or promoter group member may receive a cash-settled scheme. A workable answer is permission with safeguards, namely approval by the nomination and remuneration committee without interested members, the consent of a majority of disinterested shareholders, and disclosure of the payout formula and its ceiling. Such a rule would replace a letter addressed to one company with a standard that every issuer and lead manager can read.
Second, the ICDR Regulations should state what happens to cash-settled schemes at the DRHP stage. Schemes for non-promoter employees could continue on disclosure of the accrued liability, while promoter schemes could be required to be settled or terminated before filing unless approved on the same footing.
Third, in framing rules under section 62(1)(b), the Ministry of Corporate Affairs should state that cash-settled schemes fall outside the clause and that Rule 12’s definition governs share-settled schemes only, so that the exclusion is deliberate and does not rest on inference.
A reform meant to modernise executive compensation will, as drafted, recognise the instruments that need protection least and say nothing about those whose position is least clear. The promoter question was left open in 2015, and the Bill offers an occasion to decide it.
Endnotes
1. Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations 2021, reg 2(1)(qq), Explanation 2.
2. ibid reg 2(1)(i).
3. Corporate Laws (Amendment) Bill 2026 (Bill No 85 of 2026) cl 28.
4. Companies Act 2013, s 62(1) and s 62(1)(b).
5. Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations 2021 (n 1) reg 2(1)(qq).
6. Companies Act 2013, s 42(2); Corporate Laws (Amendment) Bill 2026, cl 26(b).
7. Companies Act 2013, s 68(5)(c), s 68(8) and s 68 Explanation I; Corporate Laws (Amendment) Bill 2026, cl 29(b), (d) and (f).
8. Companies (Share Capital and Debentures) Rules 2014, r 12(1), Explanation.
9. Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations 2021 (n 1) reg 2(1)(qq).
10. Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations 2021 (n 1) reg 1(4)(ii); Companies Act 2013, s 62(1); Companies (Share Capital and Debentures) Rules 2014 (n 8) r 12(1), Explanation.
11. Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Amendment) Regulations 2025 (published 8 March 2025).
12. Companies Act 2013, ss 188 and 197.
