Review of SEBI Sweat Equity and SBEB Regulations | Discussion Paper

Securities Exchange and Board of India

Discussion Paper

Review of SEBI (Share Based Employee Benefit) Regulations, 2014 and SEBI (Issue of Sweat Equity) Regulations, 2002

Objective

1. The objective of this discussion paper is to seek comments / views from the public on the proposals to amend SEBI (Share Based Employee Benefits) Regulations, 2014 and SEBI (Issue Of Sweat Equity) Regulations, 2002.

Background

2. SEBI (Issue of Sweat Equity) Regulations, 2002 (in short ‘Sweat Equity Regulations’) and SEBI (Share Based employee benefits) Regulations, 2014 (in short ‘SBEB Regulations’) were notified on September 24, 2002 and October 28, 2014 respectively.

3. The Sweat equity regulations provided framework for issuance of sweat equity shares by listed companies and the SBEB Regulations provided framework to regulate Employee Stock Option Scheme, Employee Stock Purchase Scheme and other share based employee benefits.

4. The stakeholders have been requesting SEBI to further streamline and rationalize the provisions of the regulations and make them more robust, sync with best global practices and ease of doing business.

Expert Group’s constitution and recommendations

5. In view of the aforesaid, SEBI constituted an Expert Group with a mandate to provide its recommendations on the following issues:

a. Revisiting the framework of SBEB regulations and suggesting policy change thereto;

b. Revisiting the framework of SEBI Sweat equity regulations vis-à-vis the Companies Act, 2013 and suggesting policy changes thereto; and

c. Suggesting, whether it is advisable to combine both the regulations and if so, providing a draft of combined regulations.

6. The Expert Group after deliberations in its several meetings, has submitted its report to SEBI on June 18, 2021. The Group has made several policy recommendations including combining both the regulations (Sweat equity regulations and SBEB regulations) and also provided a draft of the combined regulations. A copy of the Expert Group’s report is placed at Annexure – A.

Expert Group recommendations

7. Key recommendations of the Expert Group are as under:

a. In relation to the Sweat Equity Regulations, It is recommended that the objectives for which issuance of sweat equity shares are permitted be included in the Regulations, and the maximum limit on the quantum of sweat equity shares that may be issued by a company should also be incorporated in the Regulations. Additionally, relaxations with respect to quantum of sweat equity to be issued by companies which are listed on Innovators Growth Platform have also been provided. Further, it is also recommended that the lock-in period for sweat equity shares and its pricing formula should be consistent with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

b. With respect to scope of employees to be covered under the SBEB Regulations, it is recommended that keeping in mind the current employment practices, non-permanent employees may also be considered for eligibility to receive share-based employee benefits. Accordingly, “employees” as defined by companies shall be eligible for, under the SBEB Regulations, as opposed to earlier position of only for “permanent employees”.

c. Flexibility accorded to the companies to switch routes (from trust to direct route or vice versa, subject to the approval of the shareholders by special resolution, subject to the condition that such switch is not prejudicial to the interests of the employees.

d. The maximum time period prescribed under the SBEB Regulations for appropriation of shares not backed by grants acquired through secondary acquisition by a trust, be extended by an additional period of one year, subject to the approval of the Compensation Committee. Thus, such shares may be held for two years.

e. Upon winding up of schemes / trust, transfer of shares or monies held by a trust should be permitted to be transferred to one or more existing share-based employee benefit schemes under the SBEB Regulations, subject to approval of shareholders.

Public comments

8. Public comments are invited on the recommendations made by the Expert Group in its report. Specific comments/ suggestions as per the format given below would be highly appreciated:

9. Comments may please be sent at either sbebreview@sebi.gov.in or sent by post at the following address latest by July 25, 2021.

The General Manager
Division of Corporate Restructuring – II
Corporation Finance Department
Securities and Exchange Board of India
SEBI Bhavan
Plot No. C4-A, “G” Block
Bandra Kurla Complex
Bandra (East), Mumbai – 400 051

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