When terms like “amendment” or “variation” appear in the context of an ESOP scheme, the natural question is Are we talking about a regulatory change, or a change in the actual terms of the Scheme? The answer lies in distinguishing between:
- Regulatory or administrative updates, and
- Material changes in scheme terms like eligibility, vesting, or exercise conditions.
Variation can be a regulatory change and amending/altering the terms of Scheme such as Eligibility Criteria, Vesting Period, Exercise Price or Exercise period, considering the market factors and industry practices. But all the variation need not require Shareholder approval as under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“SEBI SBEB & SE Regulations”) and the Companies Act, 2013, a Compensation Committee i.e. the Nomination and Remuneration Committee (NRC) can also approve certain regulatory or administrative amendments to an existing ESOP scheme without going back to shareholders, further provided that such amendments/variations are not prejudicial to the interest of the employees.
Legal Basis & Relevant Provisions to be Considered:
- SEBI (SBEB & SE) Regulations, 2021(in terms of Listed Companies):
Regulation 7(1): A company may by special resolution of its Shareholders may vary the terms of the Scheme 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 interest of the employees.
Regulation 7(2): Notwithstanding the provisions of sub-regulation 7(1) a Company shall be entitled to vary the terms of the Scheme to meet any regulatory requirements without seeking Shareholders approval by Special Resolution.
Interpretation:
- Variations that are regulatory in nature, procedural updates, or required due to change in law including interpretation of process can be approved by the NRC/Compensation Committee.
- The General Governance laws clause as mentioned under the Scheme also gives power to the NRC/Compensation Committee to make variations in regulatory nature.
General Examples include:
- Updation in accounting standards
- Repeal/replacement of SEBI guidelines (e.g., old SBEB Regulations, 2014 → replaced in 2021)
- Shift in regulatory language (e.g., Companies Act references or disclosure format updates)
- Interpretation of Clauses, Terms, Procedures in alignment with reading with the Applicable Laws.
- Setting up and framing of internal FAQs, SOPs, Policies including further delegation implementation process to sub-committees, Delegation of power of allotments etc.
So, when exactly is Shareholder Change required?
- Shareholder approval is mandatory only when a material change is made in the terms of the Scheme which is already approved by the Shareholders which were already approved by the earlier resolution so approved by the Shareholders, such as:
- Changing in exercise price
- Changing in class of employees
- Altering vesting conditions or
- Terms of Exercise
- In terms of Companies Act, 2013- Section 62 (1)(b) of the Companies Act, 2013 read with Rule 12(6) of Companies (Share Capital and Debenture) Rules, 2014: (in terms of Unlisted Company)
“…no variation shall be made in the terms of the scheme unless it is not prejudicial to the interest of the option holders.”
Practical Examples seen where Changes can be approved at NRC level:
- Update to align with new SEBI SBEB & SE Regulations, 2021
- Change in regulatory references (Companies Act sections, etc.)
- Format change in ESOP grant letter as per law
- Tax compliance or IND AS alignment updates
Recommendation & Good Governance Practice
- For regulatory alignment changes or administrative clarifications, the NRC can pass resolutions without needing to reconvene the shareholders.
- However, it’s best practice to record the legal rationale (e.g., SEBI regulation updated, Companies Act section repealed) in the NRC minutes to establish audit clarity.
Disclaimer: The information provided in this blog is for general informational and educational purposes only and should not be construed as legal, tax, or financial advice. While efforts have been made to ensure accuracy, the content is based on publicly available legal provisions, interpretations of SEBI (SBEB & SE) Regulations, 2021, and the Companies Act, 2013, which may be subject to amendments or judicial interpretation. Readers are advised to consult with legal, tax, or compliance professionals for advice specific to their organization, especially before taking any action based on this information. The author and publisher disclaim all liability for any errors or omissions or for any loss or damage incurred as a result of reliance on the content of this blog. Regulatory frameworks may vary based on the nature of the entity (listed/unlisted), jurisdiction, or changes in law.
