Analysis of Newly Promulgated SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021

1. a permanent employee of the company who has been working in India or outside India; or
2. a director of the company, whether a whole time director or not but excluding an independent director; or
3. an employee as defined in clause (i) or (ii) of a subsidiary, in India or outside India, or of a holding company of the company

but does not include—

1. an employee who is a promoter or a person belonging to the promoter group; or
2. 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.

1. an employee as designated by the company, who is exclusively working in India or outside India; or
2. 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
3. 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—

1. an employee who is a promoter or a person belonging to the promoter group; or
2. 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

1. To include employees who are working on non-permanent basis like employees during the probation period and employees working on contractual basis.
2. To provide clarity on inclusion of Non-Executive Director.
3. In the present scenario, different companies are operating under different structures like Group Companies, Associate Companies, Joint Ventures etc. In the Erstwhile Regulations, the Employees of only Holding and Subsidiary Companies were eligible for the grant of Employee Stock Options or other Employee Benefits. Now, as per the new Regulations, the Employees of Group Companies as well as Joint Ventures and Associate Companies are also eligible for the grant of Employee Stock Options or other Employee Benefits.

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

Provided that if the scheme is to be implemented through a trust the same has to be decided upfront at the time of taking approval of the shareholders for setting up the schemes:

Provided that if the scheme is to be implemented through a trust, the same has to be decided upfront at the time of taking approval of the shareholders for setting up the scheme(s).

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.

1. Nomination and Remuneration Committee; and
2. Stakeholders Relationship Committee and further prescribes different compositions for such committees.

Therefore, in order to provide further clarification with regards to the Composition of Compensation Committee, it is now clarified in the new regulations that Compensation Committee shall be the Committee as provided under Regulation 19 of SEBI (LODR) Regulations, 2015.

As per Regulation 19 of SEBI (LODR) Regulations, 2015, the Composition of Compensation Committee will be as follows:

(a) the committee shall comprise of at least three directors;
(b) all directors of the committee shall be non-executive directors; and
(c) at least fifty percent of the directors shall be independent directors [and in case of a listed entity having outstanding SR equity shares, two thirds of the nomination and remuneration committee shall comprise of independent directors].

The Chairperson of the Nomination and Remuneration Committee shall be an Independent Director: Provided that the chairperson of the listed entity, whether executive or non-executive, may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee.

1. The company shall not vary the terms of the schemes in any manner, which may be detrimental to the interests of the employeesProvided that the company shall be entitled to vary the terms of the schemes to meet any regulatory requirements.
2. Subject to the proviso to sub-regulation (1), the company may by special resolution in a general meeting vary the terms of the schemes offered pursuant to an earlier resolution of the general body but not yet exercised by the employee provided such variation is not prejudicial to the interests of the employees.

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.

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

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.

Regulation 3(15): The trust shall not become a mechanism for trading in shares and hence shall not sell the shares in secondary market except under the following circumstances:
(a). cashless exercise of options under the scheme covered by Part A of Chapter III of these regulations;

Regulation 9(2): No person other than the employee to whom the option, SAR or other benefit is granted shall be entitled to the benefit arising out of such option, SAR, benefit etc.:

Provided that in case of ESOS or SAR, under cashless exercise, the company may itself fund or permit the empaneled stock brokers to fund the payment of exercise price which shall be adjusted against the sale proceeds of some or all the shares, subject to the provisions of the applicable law or regulations.

Part B of Schedule – I
j. the procedure for funding the exercise of options / SARs.

Regulation 3(15): The trust shall not become a mechanism for trading in shares and hence shall not sell the shares in secondary market except under the following circumstances:

(a) 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;

Regulation 9(2): No person, other than the employee to whom the option, SAR or other benefit is granted, shall be entitled to the benefit arising out of such option, SAR or other benefit:

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.

k. the procedure for buy-back of specified securities issued under these regulations, if to be undertaken at any time by the company, and the applicable terms and conditions, including:

(i) permissible sources of financing for buy-back;
(ii) any minimum financial thresholds to be maintained by the company as per its last financial
statements; and
(iii) limits upon quantum of specified securities that the company may buy-back in a financial 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.

As per the Erstwhile Regulations

As per the New Regulations

(2) The Securities and Exchange Board of India (Disclosures and Investor Protection) Guidelines, 2000 on 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 after it has issued sweat equity

(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.

Therefore, the Lock-in period for the Sweat Equity shares shall be 3 years from the date of allotment of shares in case such shares are allotted to Promoters/ Promoter Groups. However, in case where the shares are issued to any person other than Promoter/ Promoter Group, the shares shall be locked in for a period of 1 year.

As per the Erstwhile Regulations

As per the New Regulations

(b) the average of the weekly high and low of the closing prices of the related equity shares during the two weeks preceding the relevant date.

Therefore, as per the new Regulations, the Pricing of the Sweat Equity Shares will be done in a given below manner: