SEBI by a Notification dated August 13, 2021, has brought into effect the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (‘Regulations 2021’) which consolidates the SEBI (Issue of Sweat Equity) Regulations, 2002 and the SEBI (Share Based Employee Benefits) Regulations, 2014. The Regulations 2021 will govern all share-based employee benefit schemes dealing in securities, including employee stock options, employee share purchase, stock appreciation rights, general employee benefits, retirement benefits and sweat equity. The key changes that are implemented under the Regulations 2021, inter alia, include:

i.    Definition of employee (except in relation to issue of sweat equity shares): The word “permanent” has been deleted from the scope of definition of “employee” under the Regulations 2021. Accordingly, now even the non-permanent employees, who work exclusively with a company, will be eligible to avail equity-based incentives offered. It is also clarified that non-executive directors would be covered within the definition of employee;

ii.   Manner of administration of the share-based employee benefit scheme (‘Scheme’): Additional flexibility has been provided to companies to switch the mode of administration of the Scheme provided that (a) the company obtains a fresh approval of the shareholders by way of a special resolution, and (b) the change in the mode of administration is not prejudicial to the interest of employees;

iii.  Treatment of options in case of transfer of employees pursuant to a scheme of arrangement, amalgamation, merger or demerger: In case of transfer of employees, the treatment of options will be specified in the scheme of arrangement, amalgamation, merger or demerger, though such treatment cannot be to the detriment of concerned employees’ interests;

iv.   Cap on issue of sweat equity shares: Companies are required to limit their issuance of sweat equity shares to 15% of the existing paid-up equity share capital in a year and not more than 25% at any time. The cap for sweat equity issuance with respect to companies listed on the Innovators Growth Platform is 15% of paid-up equity share capital in a year, and 50% overall; and

v.    Lock-in period for sweat equity shares: The lock-in period of sweat equity shares will be the same as that provided in case of preferential issue of shares under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended from time to time.