SEBI has released new regulations for listed companies. India’s securities market is on an unprecedented roll and the market participants are both ecstatic and nervous about it. SENSEX recently crossed the 54,000 mark and the NIFTY followed closely behind with its 16,000-mark crossing. Investor optimism has been aligned with the recovery seen in the economy, with growing income inequalities shining a bright light on the market activity. Even though the assets are highly overpriced at the moment, market participants believe that a bubble burst would be a far phenomenon. Rightly so, the experts suggest being careful and look like the regulatory body agrees.
The new set of guidelines released by SEBI are believed to expand the benefit horizon for the listed companies and adopt a more inclusive approach. These new regulations come as a result of the recent merger of the Securities and Exchange Board (Share Based Employee Benefits) Regulations, 2014 (SBEB Regulations) and the SEBI (Issue of Sweat Equity) Regulations, 2002 (Sweat Equity Regulations) into the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. Here are the new regulations and all you need to know about them-
SEBI’s major regulation changes include-
This provision is in regard to the share-based employee benefits program and aims at extending its reach. To understand how to allow me to trace for you how this looked like before the new regulation. Up until now, the eligibility for share-based benefits was limited only to the permanent employees of the company and its holding and subsidiary companies. The keyword here is “permanent”, which no longer holds significance in the program thanks to the new regulation.
As per the regulations released by the Securities Exchange Board of India(SEBI) Companies would now have the option to provide share-based employees to any worker who is exclusively working for such a company or any of its group companies, including a subsidiary or an associate. Effectively, the new regulation slashes the requirement of the employee being permanent, expanding the benefits system to a greater section of employees.
Also, note that another key difference in the two provisions is the permit to group/associate companies given in the new regulations.
But why are these share-based employee benefits so important?
Experts have been rather commending this new regulation paradigm of SEBI, since they believe it would help companies retain employees for a longer period of time. Especially post-pandemic, when the labour market is at a fundamental dynamic shift, such a relationship is mutually beneficially for both the employer and employees.
Not only that, but the extended reach of the share-based employee benefits would also bring in a sense of contribution, responsibility and ownership towards the company in the employee. The theory finds evidence of increased positive motivation and incentives as a result of the same, which is directly proportional to the growth quotient of the company.
Who all are the new regulations of SEBI applicable to?
Given that the regulations have been put in place by SEBI, which only oversees listed companies, the regulations are applicable only to them. But wouldn’t unlisted companies from such an extension? Well, experts are still to give a green flag on it because of the multifold implications that come with any welfare provision. If, however, such a change is to be made for unlisted companies, it would be added in the Companies Act 2013.
Other significant changes made by SEBI-
A regulation alteration has been made in regard to the provision of instant relief to the bereaved family members in case of permanent incapacity or demise of the employee, who otherwise, would have to wait for a significant period.
In the words of SEBI, the regulations have dispensed with the requirement of a minimum vesting period and lock-in period (minimum 1 year) for all share benefit schemes, in the event of permanent incapacity or death. Experts believe this clause plays a necessary role in the post-pandemic world, given the catastrophe we just went through, with the face of the corporate world changing for the good.
Another regulatory change made by SEBI is more specific to companies than it is to employees since it is undertaken to provide aid to companies who, due to poor market conditions, we’re unable to grant or dispose of excess inventory. In order to do so, the appropriation period, which was 1 year before the regulation, has been extended to two years. The appropriation period is the time companies have for appropriating the unappropriated inventory of shares held by the trust, Th appropriation, however, is subject to the discretion of the Compensation Committee or the Nomination and Remuneration Committee.
Along with that, the alterations in regulations now allow listed companies to transfer excess shares or monies held by the trust to other share-based employee benefit schemes, at the time of its winding up, provided the shareholders’ approval of the matter. This regulation is specifically important given the need for clarity for companies to merge their assets and financial resources of the trust in a more efficient manner. The move has been commended by experts in the field since they believe this would help ensure a more organised resource management.
The issue with trust is further resolved with the alteration in the regulations permitting flexibility for administration switch from the trust route to the direct route, or the other way around. Again, the approval of shareholders has to be given in the context. One key thing to note here is that the regulatory body has warned against such a move being preferential to the employees, in which case action would be followed.
How the practical changes would be carried out is a concern for the coming days. This flexibility of administration switch is fairly important considering the earlier restriction on companies to behold the chosen route until the conclusion of the scheme. This would give companies a chance to find their way through some very tangible pitfalls of both routes.
How about sweat equity? When can we expect those shares to get issued?
Well, yes. The sweat equity will be allowed to be issued for the provision of know-how or making available.
The sweat equity shares mean shares issued by a company to its directors or employees, for non-cash consideration or at a discount, for making rights available in the nature of intellectual property rights or providing know-hows or any providing any value additions in any form, as per the definition in Section2(88) of the Companies Act 2013.
As per the new regulations, the pricing and lock-in requirements of the sweat equity shares will be aligned with the preferential issue norms as per the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
The maximum yearly limit of sweat equity shares that can be issued by a company listed on the main board has been prescribed at 15% of the existing paid-up equity share capital within the overall limit, not exceeding 25% of the paid-up capital at any time.
Further, in the case of companies listed on the Innovators Growth Platform (IGP), the yearly limit will be 15% and the overall limit will be 50% of the paid-up capital at any time. This enhanced overall limit for IGP will be applicable for 10 years from the date of the company’s incorporation. This proposal will benefit all new start-up companies seeking a listing on the IGP platform.
Edited by Sanjana Simlai.