Analysis of SEBI (Share Based Employee Benefits & Sweat Equity) Regulations, 2021

(i) an employee as designated by the company, who is exclusively working in India or outside India; or

(ii) a director of the company, whether a whole-time director or not, including a non-executive director who is not a promoter or member of the promoter group, but excluding an independent director; or

(iii) an employee as defined in sub-clauses (i) or (ii), of a group company including subsidiary or its associate company, in India or outside India, or of a holding company of the company, but does not include—

(a) an employee who is a promoter or a person belonging to the promoter group; or

(b) a director who, either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten per cent of the outstanding equity shares of the company;

Explanation—For accounting purposes, the grant date will be determined in accordance with applicable accounting standards.

(u) “independent director” shall have the same meaning assigned to it under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

(dd) “promoter group” shall have the same meaning assigned to it under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Provided further that if prevailing circumstances so warrant, the company may change the mode of implementation of the scheme subject to the condition that a fresh approval of the shareholders by a special resolution is obtained prior to implementing such a change and that such a change is not prejudicial to the interests of the employees:

The trust deed, under which the trust is formed, shall contain provisions as specified in Part A of Schedule–I of these regulations and such trust deed and any modifications thereto shall be mandatorily filed with the recognized stock exchange(s) in India where the shares of the company are listed.

Any person can be appointed as a trustee of the trust, except in cases where such person—

i. is a director, key managerial personnel or promoter of the company or its group company including its holding, subsidiary or associate company or any relative of such director, key managerial personnel or promoter; or

ii. beneficially holds ten percent or more of the paid-up share capital or the voting rights of the

company:

Provided that where individual(s) or “one person company” as defined under the Companies Act, 2013 (18 of 2013) is appointed as trustee(s), there shall be a minimum of two such trustees, and in case a corporate entity is appointed as a trustee, then it may be the sole trustee.

The above limits shall automatically include within their ambit the expanded or reduced capital of the company where such expansion or reduction has taken place on account of corporate action(s) including issue of bonus shares, split, rights issue, buy-back or scheme of arrangement.

a. Inclusion of reduction in share capital

b. Inclusion of expansion/ reduction of share capital due to buy back or scheme of arrangement.

The unappropriated inventory of shares which are not backed by grants, acquired through secondary acquisition by the trust under Part A, Part B or Part C of Chapter III of these regulations, shall be appropriated within a reasonable period which shall not extend beyond the end of the subsequent financial year, or the second subsequent financial year subject to approval of the compensation committee/nomination and remuneration committee for such extension to the second subsequent financial year.

Also, the requirement of disclosure and selling off the unappropriated shares to the stock exchange(s) in case of failure to appropriate the shares by the end of the subsequent financial year is removed.

to enable the employee to fund the payment of the exercise price, the amount necessary to meet his/her tax obligations and other related expenses pursuant to exercise of options granted under the ESOS.

based on approval granted by the Board to an applicant, for the reasons recorded in writing in respect of the schemes covered by Part A or Part B or Part C of Chapter III of these regulations, upon payment of a non-refundable fee of rupees one lakh to the Board along with the application by way of direct credit in the bank account through NEFT/RTGS/IMPS or any other mode allowed by the Reserve Bank of India.

The trust shall be required to make disclosures and comply with the other requirements applicable to insiders or promoters under the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 or any modification or re-enactment thereto.

A company shall constitute a compensation committee for administration and superintendence of the schemes:

Provided that the company may designate such of its other committees as compensation committee if they fulfil the criteria as provided in sub-regulation (2) of this regulation:

Provided further that where the scheme is being implemented through a trust the compensation committee shall delegate the administration of such scheme(s) to the trust.

The compensation committee shall be a committee of such members of the Board of Directors of the company as provided under regulation 19 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended from time to time:

Provided that a company may also opt to designate its nomination and remuneration committee as the compensation committee for the purposes of these regulations.

Also, a proviso is added to provide that a company may also opt to designate its nomination and remuneration committee as the compensation committee.

The compensation committee shall, inter alia, formulate the detailed terms and conditions of the schemes which shall include the provisions as specified in Part B of Schedule – I of these regulations.

The compensation committee shall frame suitable policies and procedures to ensure that there is no violation of securities laws including the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 and the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003, as amended from time to time, by the trust, the company and its employees, as may be applicable.

The explanatory statement to the notice and the resolution proposed to be passed by shareholders for the schemes shall contain the information as specified in Part C of Schedule – I of these regulations or as otherwise specified by the Board.

(1) 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.

(2) Notwithstanding the provisions of sub-regulation (1), a company shall be entitled to vary the terms of the schemes to meet any regulatory requirement without seeking shareholders’ approval by special resolution.

In case of winding up of the schemes being implemented by a company, the excess monies or shares remaining with the trust after meeting all the obligations, if any, shall be utilised for repayment of loan or by way of distribution to employees or subject to approval of the shareholders, be transferred to another scheme under these regulations, as recommended by the compensation committee.

Provided that in case of ESOS or SAR, subject to applicable laws, the company or the trustee may fund or permit the empanelled stock brokers to make suitable arrangements to fund the employee for payment of exercise price, the amount necessary to meet his/her tax obligations and other related expenses pursuant to exercise of options granted under the ESOS or SAR and such amount shall be adjusted against the sale proceeds of some or all the shares of such employee.

In the event of resignation or termination of an employee, all the options, SAR or any other benefit which are granted and yet not vested as on that day, shall expire:

Provided that an employee shall, subject to the terms and conditions formulated by the compensation committee under sub-regulation (3) of regulation 5 of these regulations, be entitled to retain all the vested options, SAR or any other benefit covered by these regulations.

Explanation—The cessation of employment due to retirement or superannuation shall not be covered by this sub-regulation, and such options, SAR or any other benefit granted to an employee would continue to vest in accordance with the respective vesting schedules even after retirement or superannuation in accordance with the company’s policies and the applicable law.

In the event that an employee who has been granted benefits under a scheme, is transferred pursuant to scheme of arrangement, amalgamation, merger or demerger or continued in the existing company, prior to the vesting or exercise, the treatment of options in such case shall be specified in such scheme of arrangement, amalgamation, merger or demerger provided that such treatment shall not be prejudicial to the interest of the employee.

In case a new issue of shares is made under any scheme, shares so issued shall be listed immediately on all recognised stock exchange(s) where the existing shares are listed, subject to the following conditions:

(a) The scheme is in compliance with these regulations;

(b) A statement, as specified in Part D of Schedule – I of these regulations, is filed and the company obtains an in-principal approval from the recognised stock exchange(s);

(c) As and when an exercise is made, the company notifies the concerned recognised stock exchange(s) as per the statement as specified in Part E of Schedule – I of these regulations.

b. In the existing provisions, it was mentioned that a statement as specified by SEBI is filed which is now updated and the statement is now specified in Part D of Schedule–I of the merged regulations itself. (for clause b)

c. In the existing provisions, it was mentioned that statement as specified by SEBI is to be used for notifying the concerned SE which is now updated and the statement is now specified in Part E of Schedule–I of the merged regulations itself. (for clause c)

The shares arising after the IPO of an unlisted company, out of options or SAR granted under any scheme prior to its IPO to the employees, shall be listed immediately upon exercise on all the recognised stock exchanges where the shares of the company are listed subject to compliance with the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 and wherever applicable, sub-regulation (1) of regulation 12 of these regulations.

No change shall be made in the terms of options or shares or SAR issued under such pre-IPO schemes, whether by repricing, change in vesting period or maturity or otherwise unless prior approval of the shareholders, by way of special resolutions, is taken for such a change, except for any adjustments for corporate actions made in accordance with these regulations.

For listing of shares issued pursuant to ESOS, ESPS or SAR, the company shall obtain the in-principal approval of the recognized stock exchanges where it proposes to list the said shares prior to the grant of options or SARs.

In the case of every company which has passed a resolution for the scheme(s) under these regulations, the Board of Directors shall at each annual general meeting place before the shareholders a certificate from the secretarial auditors of the company that the scheme(s) has been implemented in accordance with these regulations and in accordance with the resolution of the company in the general meeting.

In addition to the information that a company is required to disclose in relation to employee benefits under the Companies Act, 2013 (18 of 2013), the Board of Directors of such a company shall also disclose the details of the scheme(s) being implemented, as specified in Part F of Schedule – I of these regulations.

Any company implementing any of the share-based schemes shall follow the requirements including the disclosure requirements of the Accounting Standards prescribed by the Central Government in terms of section 133 of the Companies Act, 2013 (18 of 2013) including any ‘Guidance Note on Accounting for employee share-based Payments’ issued in that regard from time to time.

No ESOS shall be offered unless the disclosures, as specified in Part G of Schedule–I of these regulations, are made by the company to the prospective option grantees.

There shall be a minimum vesting period of one year in case of ESOS:

Provided that 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 required under this sub-regulation:

Provided further that 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, the options shall vest in terms of sub-regulation (4) of regulation 9 of these regulations, on the date of the death or permanent incapacity.

Explanation—The company implementing an ESOS shall frame an appropriate policy with respect to the death or permanent incapacity of an employee, subject to compliance with applicable laws.

b. In the event of death or permanent incapacity of an employee, there shall be no minimum vesting period for all share benefit schemes.

The amount paid by the employee, if any, at the time of grant, vesting or exercise of option—

(a) may be forfeited by the company if the option is not exercised by the employee within the exercise period; or

(b) may be refunded to the employee if the options are not vested due to non-fulfilment of conditions relating to vesting of option as per the ESOS.

Provided further that 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.

No SAR shall be offered under any SAR scheme unless the disclosures, as specified in Part G of Schedule – I of these regulations, are made by the company to the prospective SAR grantees.

Provided further that 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.

Explanation—The company implementing a SAR scheme shall frame an appropriate policy with respect to the death or permanent incapacity of an employee, subject to compliance with applicable laws.

The shares of the company or shares of its listed holding company shall not exceed ten per cent 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 compliance with sub-regulation (2) at the time of adoption of such balance sheet by the company.

The shares of the company or shares of its listed holding company shall not exceed ten per cent 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 compliance with sub-regulation (3) at the time of adoption of such balance sheet by the company.

Nothing contained in this chapter shall apply to an unlisted company:

Provided that an unlisted company coming out with initial public offer and seeking listing of its securities on the recognized stock exchange, pursuant to issue of sweat equity shares, shall comply with the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirement) Regulations, 2018.

[Applicability]

To bring in line with the existing provisions.

For the purpose of this chapter, the term “employee” means,

(i) an employee of the company working in India or abroad; or

(ii) a director of the company whether a whole-time director or not.

A company whose equity shares are listed on a recognised stock exchange may issue sweat equity shares in accordance with section 54 of the Companies Act, 2013 (18 of 2013) and these regulations to its employees for their providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

[Sweat equity shares may be issued to employee, promoter]

Self-explanatory.

A company shall not issue sweat equity shares for more than fifteen percent of the existing paid-up equity share capital in a year:

Provided that the issuance of sweat equity shares in the company shall not exceed twenty five percent of the paid-up equity share capital of the company at any time:

Provided further that a company listed on Innovators Growth Platform shall be permitted to issue not more than fifteen percent of the paid-up equity share capital in a financial year subject to overall limit not exceeding fifty percent of the paid-up equity share capital of the company, up to ten years from the date of its incorporation or registration.

(1) For the purposes of passing a special resolution under clause (a) of sub-section (1) of section 54 of the Companies Act, 2013 (18 of 2013), the explanatory statement to be annexed to the notice for the general meeting pursuant to section 102 of the Companies Act, 2013 (18 of 2013) shall contain disclosures as specified in the Schedule – II of these regulations.

(2) The issue of sweat equity shares to employees who belong to promoter or promoter group shall be approved by way of a resolution passed by a simple majority of the shareholders in general meeting:

Provided that for passing such a resolution, voting through postal ballot and/or e-voting as specified under Companies (Management and Administration) Rules, 2014 shall also be adopted;

Provided further that the promoters/promoter group shall not participate in such resolution.

(3) Each issue of sweat equity shares shall be voted by a separate resolution.

(4) The resolution for issue of sweat equity shares shall be valid for a period of not more than twelve months from the date of passing of the resolution.

[Special Resolution & Issue of Sweat Equity Shares to Promoters]

Regulations 5 & 6 of the existing regulations are merged into one regulation i.e., regulation 32.

The price of sweat equity shares shall be determined in accordance with the pricing requirements stipulated for a preferential issue to a person other than a qualified institutional buyer under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

[Pricing of sweat equity shares]

Self-explanatory.

(1) The valuation of the know-how or intellectual property rights or value addition shall be carried out by a merchant banker.

(2) The merchant banker may consult such experts and valuers, as it may deem fit, having regard to the nature of the industry and the nature of the valuation of know-how or intellectual property rights or value addition.

[Valuation of intellectual Property]

Self-explanatory.

[Placing of auditor’s certificate before annual general meeting]

In the general meeting subsequent to the issue of sweat equity shares, the Board of Directors shall place before the shareholders, a certificate from the secretarial auditor of the company that the issue of sweat equity shares has been made in accordance with these regulations and in accordance with the resolution passed by the company authorizing the issue of such sweat equity shares.

[Placing of Auditors Before Annual General Meeting]

This is a major amendment, as earlier, the certificate was required from the auditors of the Company but now the same is to be obtained from the secretarial auditors of the company.

[Ceiling on managerial remuneration]

The amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purpose of sections 196, 197 and other applicable provisions of the Companies Act, 2013 (18 of 2013), if the following conditions are fulfilled:

(i) the sweat equity shares are issued to any director or manager; and

(ii) the sweat equity shares are issued for non-cash consideration, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the relevant accounting standards.

[Ceiling on managerial remuneration]

Self-explanatory.

[Lock-in of sweat equity shares]

(1) The sweat equity shares shall be locked in for such period of time as specified in relation to a preferential issue under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended from time to time.

(2) The provisions of the Securities and Exchange Board of India (Issue of Capital and Disclosures Requirements) Regulations, 2018 in respect of public issue in terms of lock-in and computation of promoters’ contribution shall apply if a company makes a public issue after it has issued sweat equity shares.

[Lock-in of sweat equity shares]

Self-explanatory.

[Applicability of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011]

Any acquisition of sweat equity shares shall be subject to the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

[Applicability of Takeover]

Self-explanatory.

[Obligations of the company]

(a) the explanatory statement to the notice for general meeting contains the disclosures specified under clause (b) of sub-section (1) of section 54 of the Companies Act, 2013 (18 of 2013) and sub-regulation (1) of regulation 32 of these regulations.

(b) the secretarial auditor’s certificate required under regulation 36 is placed in the general meeting of the shareholders.

[Obligations of the company]

a. To bring in line with the existing provisions.

b. To bring in line with Regulation 36 of these regulations.

[Exemption from enforcement of the regulations in other cases]

A company making an application under sub-regulation (1), shall pay a non-refundable fee of rupees one lakh by way of direct credit in the specified bank account of the Board through NEFT/RTGS/IMPS or any other mode allowed by the Reserve bank of India.

[Power to relax strict enforcement of the regulations]

Apart from some clerical changes, the major change is that the words, “by way of a banker’s cheque or demand draft payable at Mumbai in favour of the Board.” is deleted from the end of the sub-regulation leaving the option of banker’s cheque and DD unusable for the purpose.

[Directions by the Board]

Without prejudice to provisions of the Act and those of the Companies Act, 2013 (18 of 2013), the Board may in case of any violation of these regulations and in the interests of the investors and the securities market issue such directions as it deems fit.

[Directions by the Board and action in case of default]

Self-explanatory.

[Repeals and savings]

(1) The Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 and the Securities and Exchange Board of India (Issue of Sweat Equity) Regulations, 2002 are hereby repealed.

(2) Notwithstanding such repeal—

(a) the previous operation of the repealed regulations or anything duly done or suffered thereunder, any right, privilege, obligation or liability acquired, accrued or incurred under the repealed regulations, any penalty, forfeiture or punishment incurred in respect of any contravention committed against the repealed regulations, or any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid, shall remain unaffected as if the repealed regulations had never been repealed;

(b) anything done or any action taken or purported to have been done or taken including any adjudication, enquiry or investigation commenced or show cause notice issued under the repealed regulations prior to such repeal, shall be deemed to have been done or taken under the corresponding provisions of these regulations; and

(c) after the repeal of the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 and the Securities and Exchange Board of India (Issue of Sweat Equity) Regulations, 2002, any reference thereto in any other regulations, guidelines or circulars issued by the Board shall be deemed to be a reference to the corresponding provisions of these regulations.