The Securities and Exchange Board of India (SEBI) recently introduced the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. This latest regulatory amendment expands the set of employees eligible for equity (stock) options. The merger of the SEBI (Share Based Employee Benefits) Regulations, 2014, and the SEBI (Issue of Sweat Equity) Regulations, 2002, is essentially aimed at protecting investors’ interests in securities and regulating the securities marketplace.
Understanding Sweat Equity
Sweat equity represents a non-financial contribution made by company founders or individuals. This resource becomes especially vital for startups and businesses with limited cash flow aiming to fund their operations. According to Section 2(88) of the Companies Act, 2013, sweat equity shares refer to equity shares that a company issues to its directors or employees either at a discount or traded for something other than cash.
These shares are issued as compensation for intellectual property rights, know-how, or value additions. The maximum annual limit of sweat equity shares issued by a listed company is capped at 15% of the existing paid-up equity share capital, with an overall limit not surpassing 25% of the paid-up capital at any moment. For companies listed on the Innovators Growth Platform (IGP), the annual cap is 15%, and the total limit is 50% of the paid-up capital, valid for ten years from the date of incorporation.
Innovators Growth Platform (IGP)
SEBI launched IGP, previously known as the ‘Institutional Trading Platform’, in 2019, with the objective of listing issuers heavily reliant on technology, IT, intellectual property, data analytics, biotechnology, or nano-technology. These platforms should significantly enhance the value of services, products, or business. This initiative is expected to benefit new startups seeking listing on the IGP platform.
Share-based Employee Benefits
Companies can now offer share-based employee benefits to exclusive employees of that company or any of its group companies, including subsidiaries or associates. This provision is expected to incentivise companies to better use share-based employee benefits for employee retention over extended periods. Additionally, it instills a sense of responsibility and ownership in employees, motivating them to contribute to the company’s growth.
Changes in Locking Period
In circumstances of permanent incapacity or death, SEBI regulations have abolished the need for a minimum vesting period and lock-in period (minimum 1 year) for all share benefit schemes. This change aims to provide immediate relief to affected employees and their families.
Applicability of New Rules
The new rules apply only to listed companies, as these have been framed by SEBI, which regulates only such companies. Listed companies are those whose shares are openly tradable on a stock exchange, while unlisted companies’ shares are not tradable on the stock market. For unlisted companies, any changes would require amendments to the Companies Act 2013.
