August 12, 2023
SEBI (Issue of Sweat Equity) Regulations, 2002, and SEBI (Share Based Employee Benefits) Regulations, 2014, were introduced on September 24, 2002, and October 28, 2014, respectively. The Sweat Equity Regulations governed the issuance of Sweat Equity shares by listed companies, while the SBEB Regulations regulated Employee Stock Option Schemes, Employee Stock Purchase Schemes, and other share-based employee benefits.
To enhance regulatory ease of doing business, it was proposed to explore the merger of both regulations as they dealt with employee benefits related to equity shares of listed companies. An Expert Group was formed by SEBI to analyze the proposals and provide recommendations on revisiting the frameworks of both regulations, suggesting policy changes, and drafting combined regulations.
Erstwhile Regulations: The definition of"employee" under the erstwhile regulations included permanent employees, directors, and employees of subsidiaries and holding companies.
New Regulations: The definition of"employee" was expanded in the new regulations to include contractual employees, "gig workers," employees on probation or deputation,non-executive directors (not belonging to the promoter group), and employees of group companies and associate companies.
Reason for the Change: The change was made to include non-permanent employees and provide clarity regarding the eligibility of non-executive directors for employee benefits. The new regulations aimed to be more inclusive and cover a broader spectrum of employees.
Erstwhile Regulations: Both the erstwhile and new regulations define the "grant date" as the date when the compensation committee approves the grant.
New Regulations: The new regulations added an explanation to determine the grant date for accounting purposes as per applicable accounting standards.
Reason for the Change: The change was introduced to bring transparency and consistency in financial reporting. By specifying the grant date as per applicable accounting standards, companies can adhere to standardized accounting practices, ensuring accuracy and consistency in their financial reporting.
Erstwhile Regulations: The erstwhile regulations allowed implementation through direct means or by setting up an irrevocable trust, with the need for upfront approval from shareholders in the case of a trust.
New Regulations: The new regulations retained these options but provided flexibility to change the implementation mode (trust to direct route or vice versa) with special resolution approval, ensuring no prejudice to employee interests.
Reason for the Change: The rationale behind the change was to grant companies more flexibility in choosing the implementation route for their schemes, whether through a trust or directly. The change allows companies to switch routes based on their specific needs and circumstances, subject to approval from shareholders through a special resolution. This ensures that the change benefits the employees and is made in their best interest.
Erstwhile Regulations: The erstwhile regulations required the compensation committee to be comprised of members of the board of directors as per the Companies Act, 2013.
New Regulations: The new regulations specified that the compensation committee should consist of members as per Regulation 19 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The company had the option to designate its nomination and remuneration committee as the compensation committee.
Reason for the Change: The change was introduced to provide greater flexibility to companies in designating their Compensation Committees.Since listed companies are already required to have a Nomination and Remuneration Committee (NRC) under Regulation 19 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, this change allows them to use the NRC as the Compensation Committee as well. By making the requirements for the constitution of the Compensation Committee part of the existing NRC, there is no need to set up a separate committee. This streamlines the governance structure, reduces administrative burden, and ensures efficient utilization of existing committees while still fulfilling the regulatory requirements for both NRC and Compensation Committee functions.
Erstwhile Regulations: The erstwhile regulations allowed the excess monies or shares remaining with the trust upon winding up to be utilized for repayment of loans or distributed to employees as recommended by the compensation committee.
New Regulations: The new regulations permitted such excess funds to be used for repayment, distribution to employees, or transferred to another scheme, subject to shareholder approval.
Reason for the Change: The change was made to ensure that the assets held in the trust, which are intended for the benefit of the employees, are utilized appropriately. If there is any surplus remaining in the trust upon winding up, the change allows for deferring the utilization of such funds or using them for the benefit of employees through a different scheme.This provision enables companies to transfer shares or funds held in the trust to one or more existing share-based employee benefit schemes. Nevertheless,such transfers require approval from the shareholders to ensure transparency and accountability in the process. This change aims to optimize the use of trust assets and ensure that they continue to benefit the employees even after the winding up of a particular scheme.
Erstwhile Regulations: Both the erstwhile regulations and the new regulations provided for the vesting of options, SAR, or benefits to the legal heirs or nominees of a deceased employee.
New Regulations: The new regulations clarify that such vesting should occur immediately from the date of death.
Reason for the Change: The change was introduced to adopt a more compassionate approach in cases of an employee's death or permanent incapacity. By allowing immediate vesting of options, SAR (Stock Appreciation Rights), or other benefits in such situations, the regulations acknowledge the special circumstances that arise due to unfortunate events. This change ensures that the legal heirs or nominees of the deceased or incapacitated employee can receive the benefits without delay, providing financial support during difficult times. The lenient view aims to be considerate of the affected parties and their needs, recognizing the sensitivity of such circumstances and facilitating a smooth transition of benefits to the rightful beneficiaries.
Erstwhile Regulations: The erstwhile regulations required a certificate from auditors to be presented at each AGM.
New Regulations: The new regulations specified that the certificate should be obtained from secretarial auditors to ensure compliance with these regulations and the resolution of the company.
Reason for the Change: The change was implemented to address the lack of clarity in the erstwhile regulations regarding the appropriate authority to provide the certificate referred to under Regulation 13. Under the new regulations, the requirement to obtain the audit certificate from the secretarial auditor is introduced. The rationale behind this change is that the secretarial auditor, being an independent practising company secretary, possesses a more comprehensive understanding of the relevant laws and regulations compared to other categories of auditors. Moreover, Regulation 24A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations mandates the secretarial auditor to furnish a secretarial audit report on an annual basis. The Institute of Company Secretaries of India (ICSI) has further supported this change by requesting SEBI, through a specific letter dated January 25, 2021, to authorize company secretaries in practice to provide the applicable certification under Regulation 13 of the SEBI (Share-Based Employee Benefits) Regulations. This highlights the expertise and suitability of company secretaries in performing such certification tasks effectively.
Erstwhile Regulations: The erstwhile regulations did not provide a specific purpose for the issuance of sweat equity shares.
New Regulations: The new regulations clarify that such issuance should be for providing know-how, intellectual property rights, or value additions.
Reason for the Change: The change was introduced to address a gap in the erstwhile regulations, which did not explicitly state the permissible purpose or objective for the issuance of sweat equity shares.Unlike the Companies (Share Capital and Debentures) Rules, 2014, which provided specific purposes for unlisted companies, the erstwhile regulations lacked such clarity for listed companies. Due to this ambiguity, listed companies were unsure whether the issuance of sweat equity shares was entirely discretionary or restricted to certain purposes/objectives. The new regulations aim to streamline the process and provide clarity by specifying the objective or purpose of issuing sweat equity shares. By doing so, companies can align their issuance decisions with specific objectives, ensuring transparency and adherence to the regulations.
Erstwhile Regulations: The new regulations set a maximum limit on the quantum of sweat equity shares that a company could issue.
New Regulations: The new regulations capped the issue of sweat equity shares at 15% of the existing paid-up equity share capital in a year. The maximum limit was set at 25% of the paid-up equity share capital at any time. Innovators Growth Platform listed companies could issue up to 15% of paid-up equity share capital in a year, subject to an overall limit of 50% for ten years from incorporation.
Reason for the Change: The change was implemented because the erstwhile regulations did not set a maximum limit on the number of sweat equity shares that a company could issue. Unlike the Companies (Share Capital and Debentures) Rules, 2014, which provided a limit for unlisted companies,there was no such restriction for listed companies under the erstwhile regulations. The introduction of a maximum limit on the quantum of sweat equity shares is intended to bring consistency and standardization across regulations.By specifying the maximum limit, SEBI aims to ensure that the issuance of sweat equity shares remains within reasonable bounds, preventing excessive dilution of equity and safeguarding the interests of shareholders and investors.
Erstwhile Regulations: The erstwhile regulations mandated a lock-in period of three years from the date of allotment.
New Regulations: The new regulations linked the lock-in period to that of preferential issue under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
Reason for the Change: The change in the lock-in period for sweat equity shares was driven by concerns that the previous lock-in period of 3 years, as per the erstwhile regulations, negatively impacted the attractiveness of sweat equity shares. A shorter lock-in period would make sweat equity shares more appealing to employees, promoting employee participation in the company's growth. To ensure consistency and uniformity in regulations, the lock-in period for sweat equity shares was aligned with the lock-in period prescribed for preferential issues under the Issue of Capital and Disclosure Requirements (ICDR) Regulations. As a result of this policy change, sweat equity shares allocated to promoters or promoter groups will be held for a mandatory lock-in period of 3 years starting from the date of allotment.In contrast, shares issued to individuals other than promoters and promoter groups will have a shorter lock-in period of 1 year. This modification aims to strike a balance between incentivizing employees through sweat equity shares and maintaining reasonable restrictions to protect the interests of the company and its stakeholders.
The SEBI (Share-Based Employee Benefits and Sweat Equity) Regulations, 2021,represent a significant overhaul of the regulatory landscape governing employee benefits and sweat equity shares. The changes introduced in the new regulations aimed to bring clarity, flexibility, and transparency to the issuance and implementation of employee benefit schemes while ensuring better protection of employee interests and company stakeholders. By understanding the rationale behind each change, companies can better navigate the revised regulations and align their practices with the evolving corporate governance standards.