Independent Directors (IDs) are not eligible to acquire sweat equity shares or Employee Stock Options (ESOPs). For sweat equity shares, IDs meet the definition of “employee” under SEBI regulations and the Companies Act, 2013, making them technically eligible for issuance. However, Section 149(1)(c) of the Companies Act disqualifies IDs from holding such shares, as it would create a pecuniary relationship with the company, rendering them ineligible to act as IDs. Regarding ESOPs, Section 149(9) of the Companies Act explicitly prohibits IDs from being granted stock options. SEBI regulations also exclude IDs from the definition of “employee” for ESOP eligibility. IDs may only receive remuneration as board fees, reimbursement for meeting participation, and profit-related commission, as approved by shareholders.
Case 1: First lets talk about Sweat Equity shares
# Listed company issue sweat equity shares in compliance with ch-iv / regulation 28 to 40 SEBI(SBEB & SE)Reg-2021, and Reg-29 provIDes Definition of employee in relation to issue of sweat equity shares as follows:
(i) an employee of the company working in India or abroad; or
(ii) a director of the company whether a WTD or not.
# Unlisted Company issue sweat equity shares in compliance with section-54 of CA2013, read with rule-8 of Co.(SCD)Rules2014, and rule-8 provide definition of employee for purpose of issuing sweat equity shares (i.e. employees to whom sweat equity shares can be issued), as follows:
(a) a permanent employee of the company who has been working in India /outsIDe India, for min. 1 year, or
(b) a director of the company, whether a WTD or not; or
(c) an employee or a director as defined in sub-clauses (a) or (b) above of a subsIDiary, in India or outsIDe India, or of a holding company of the company;
# Hence it is clear that in both listed and unlisted company sweat equity shares may be issued to director who may or may not be WTD, i.e. he may ID or NED.
# Hence ID is indeed legible for sweat equity shares, but he cannot acquire them, because once you look at section 149(1)(c) that state” person is eligible to be ID who has or had no pecuniary relationship, other than remuneration as such director or having transaction not > 10%. of his total income with the co./ hold./ sub./ ass. or their promoters, or directors, during the 2 IPFY or current FY.”
# That means ID cannot acquire sweat equity otherwise he will become ineligible to be ID because having shares of company constitutes pecuniary relationship with company and this apply to both listed and unlisted company.
#(transaction and pecuniary interest are different term, transaction is one time affair that does not have continuing importance e.g. ID purchase other company’s shares from company, but pecuniary interest is a continuing affair like purchasing company’s own shares, hence don’t think that this 10% limit will apply to sweat equity also)
Case 2: Eligibility of ID for ESOP
# Sec-149(9) of CA2013, Notwithstanding CA2013, but subject to section197 and 198, an independent director shall not be entitled to any stock option and may receive remuneration = fee as per 197(5) + reimbursement of expenses for participation in the Board and other meetings + profit related commission as may be approved by the members .
# Regulation 2(1)(i)(i) provides for meaning of employee for purpose of ESOP/ESPS/SAR/GEBS/RBS, and states that employee means a director of the company, whether a WTD or not, including a NED who is not a promoter or member of the promoter group, but excluding an ID.
# Hence ID is ineligible for ESOP in both listed and unlisted company.
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