Listed companies will now be able to grant ESOPs to reward even their contractual employees. Capital Market Regulator SEBI has proposed this idea based on the recommendations of the working group constituted by it with experts from the industry.

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Working group suggested change in the definition of employee to include non-permanent staff also.

As a major relief for employees and their legal heirs the discussion paper has also suggested leniency in lock on of ESOPs in case of death or permanent incapacity of the employee, similarly in case of cessation of employment due to closure of business, layoffs or similar measures.

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Expert Group also recommended that if due to regulatory requirement, a company is unable to issue shares, there should be an option to settle in cash (assuming this is already contemplated under the plan previously approved by shareholders). If not covered in the plan, this settlement in cash option should be approved by the shareholders.
More details can be taken from the executive summary. Important parts highlighted.

B. EXECUTIVE SUMMARY

Pursuant to detailed deliberations, the Expert Group has made its recommendations in relation to certain key aspects and practical issues involving the SBEB Regulations and the Sweat Equity Regulations, some of which are summarized below.

1. In relation to applicability of the SBEB Regulations to restricted stock units and phantom stock options, the Expert Group concluded that the provisions of the SBEB Regulations governing employee stock option schemes would apply mutatis-mutandis to restricted stock units. Further, an informal guidance from the SEBI in 2015 had already clarified the non-applicability of the SBEB Regulations to phantom stocks.

2. The Expert Group deliberated on the scope of the definition of “employee” under the SBEB Regulations and whether it included contractual employees, “gig workers” and employees on probation or deputation. The Expert Group concluded that companies should be given the flexibility to determine the persons that are categorized as “employees”. Further, the Expert Group also recommended amendment in the SBEB Regulations to delete the word “permanent” from the definition keeping in mind the prevalence of employment practices of engaging non-permanent employees and that such employees may be considered for eligibility to receive share-based employee benefits under the SBEB Regulations.

3. The Expert Group considered certain aspects involving administration of a scheme under the SBEB Regulations by the “Compensation Committee”. The Expert Group was of the view that the SBEB Regulations should be amended to provide further clarity on the composition for such committee and that a company should be permitted to designate its Nomination and Remuneration Committee as its Compensation Committee.
 
4. The Expert Group also considered various practical issues in relation to implementation of a scheme through a trust. On the flexibility to alter the route for administration of a scheme, the Expert Group concluded that companies should be permitted to switch routes (from trust to direct route or vice versa, after such route had been implemented) subject to the approval of the shareholders by special resolution and provided such switch is not prejudicial to the interests of the employees. The Expert Group also agreed with the position under the SBEB Regulations that independent directors are Page 7 of 138 not eligible to be appointed as trustees. Further, in relation to availing of loans by a trust, the Expert Group concluded that companies and their trusts should be entitled to identify and avail loans from or financing through legally permissible modes as they deem fit. Further, in relation to compliance by a trust with the PIT Regulations, the Expert Group agreed with the position of the SEBI that such regulation is required to ensure transparency and good governance, and accordingly, no relaxations were recommended in the SBEB Regulations.

 5. In relation to voting of shares held by the trust, the Expert Group concluded that no regulatory change was required in this regard. Also, the Expert Group was of the view that such shares should be considered for determination of the percentage of voting rights under the SAST Regulations. The Expert Group also deliberated on whether shares held by the trust should be classified as “public” shareholding for determining minimum public shareholding (MPS) requirements under the SCRR. The Expert Group concluded that this matter had been expressly clarified under the SBEB Regulations and SCRR and such shares were excluded from such calculation.

6. The Expert Group also considered the lock-in restrictions imposed on trusts under the SBEB Regulations for shares acquired through the secondary market and concluded that such restrictions needed to be retained and did not require any amendment. The Expert Group also deliberated on the maximum time period prescribed under the SBEB Regulations for appropriation of shares not backed by grants acquired through secondary acquisition by a trust. The Expert Group recommended extension of such maximum time period by an additional period of one year, subject to the approval of the Compensation Committee/Nomination and Remuneration Committee.

7. Further, on whether any clarification is required under the SBEB Regulations for acquisition limits to apply to stock appreciation rights, the Expert Group concluded that from the provisions of the Regulation 3(11) (including the Explanations thereto) of the SBEB Regulations, trusts administering schemes of stock appreciation rights would need to comply with the limits prescribed there under. Separately, the Expert Group was also of the view that prescribing limits upon shares held pursuant to primary issuance by a trust was not required since the shares held by trusts do not carry voting rights and such shares are excluded from the “public” shareholding determination. Further, the Expert Group also recommended that similar to expansion of share capital, Page 8 of 138 the reduction of share capital should also be factored in the calculation of limits of shareholding of trusts under secondary acquisition.

8. In relation to disclosures to be made by a company in compliance with Rule 16 of the Companies (Share Capital and Debenture) Rules, 2014, the Expert Group deliberated on whether in the explanatory statement the requirement for disclosure of the trust of details of trustees and particulars of trust may be deleted since it would be more viable to constitute a trust after the approval from the shareholders has been sought. The Expert Group also recommended that the SEBI may consider inclusion of the provisions of the 2015 Circular as part of the SBEB Regulations. The Expert Group further suggested certain additional disclosure requirements for employee stock purchase schemes.

 9. The Expert Group recommended certain clarifications in the language for variation of a scheme under the SBEB Regulations to make clear that while variations in schemes approved under the SBEB Regulations should not be detrimental or prejudicial to the interests of employees and require a special resolution of its shareholders, such requirements would not apply in case of a variation of the scheme for the purpose of meeting any regulatory requirement.

10. The Expert Group also deliberated on certain aspects involving grant, vesting and exercise of options and rights. In relation to grant date, based on feedback, the Expert Group recommended that a clarification should be included in the definition of “grant date” that for accounting purposes, the grant date will be determined in accordance with applicable accounting standards. The Expert Group also deliberated on the vesting period in case of death or permanent incapacity of the employee during the first year from date of grant. The Expert Group recommended that a more lenient view could be taken in such situations to allow for immediate vesting, instead of vesting of only such granted benefits that are in proportion to the period of service. Further, in relation to cessation of employment, the Expert Group was of the view that provisions under Regulation 9(6) of the SBEB Regulations that apply to resignation or termination would also apply to cessation of employment due to closure of business, layoffs or similar measures. However, cessation of employment due to retirement or superannuation would not be covered by Regulation 9(6) of the SBEB Regulations and such options, SAR or any other benefits granted to an employee would continue to vest in accordance with their respective vesting schedules even after Page 9 of 138 retirement or superannuation in accordance with company policies and applicable law.

11. In relation to the certification to be placed before the shareholders at an annual general meeting in compliance with Regulation 13 of the SBEB Regulations certifying that the scheme(s) is in compliance with the SBEB Regulations, the Expert Group concluded that such audit certificate should be procured from such secretarial auditor.

12. With respect to the issue of multiple approvals required from the stock exchanges, the Expert Group recommended that the SEBI and stock exchanges consider combining multiple approvals into composite approvals, where feasible.

13. In relation to settlement of cash in lieu of shares in certain circumstances, the Expert Group recommended that if due to regulatory requirement, a company is unable to issue shares, there should be an option to settle in cash (assuming this is already contemplated under the plan previously approved by shareholders). If not covered in the plan, this settlement in cash option should be approved by the shareholders.

14. The Expert Group also considered whether the threshold of 10% of the book value/market value/fair value of total assets for general employee benefits schemes should continue to be considered on an ongoing basis and recommended that such assessment should be made as on the date of the balance sheet.

15. In relation to the Sweat Equity Regulations, the Expert Group recommended that the purpose/objectives for which issuance of sweat equity shares should be permitted, and the maximum limit on the quantum of sweat equity shares that may be issued by a company should be incorporated in the Sweat Equity Regulations. The Expert Group further recommended that the lock-in period for equity shares and pricing formula should be consistent with the ICDR Regulations.

16. The Expert Group considered the issue that allotment of equity shares pursuant to exercise of stock options was not part of the methods prescribed by the SEBI for achieving MPS. The Expert Group recommended that even if the listed entity is yet to achieve MPS compliance after an initial public offering, and options have been granted prior to or after the initial public offering in compliance with the SBEB Regulations and applicable law, then allotment of shares be permitted to the said employees exercising the options (provided these options are not held by the promoters and promoter group). However, such shares should not be included under the definition of “public shareholding” for purposes of meeting the MPS requirement. The Expert Group recommended that the SEBI may issue a clarification in this regard as part of the MPS circulars and/or the SCRR. 17.

The Expert Group also recommended a draft of the proposed combined regulations comprising the SBEB Regulations and the Sweat Equity Regulations.