Applicability

These regulations of Chapter II are applicable to:

• Listed entity seeking to grant Share based employee benefits & Sweat Equity
• Listed entity seeking to grant Share based employee benefits

Compliance Requirements under the Regulations

1. Implementation of Share based employee benefit scheme (Regulation 3(1),(2),(3))

A company may implement a share based benefit scheme(s) either directly or by setting up an irrevocable trust(s)

a) If the scheme is to be implemented through a trust, the same has to be decided upfront at the time of taking approval of the shareholders for setting up the scheme(s)

b) If the mode of implementation of the scheme is to be changed, then a fresh approval of the shareholders by a special resolution is to be obtained prior to implementing such a change and such a change is not prejudicial to the interests of the employees

c) If the scheme(s) involves secondary acquisition or gift or both, then it shall be mandatory for the company to implement such scheme(s) through a trust(s).

d) Several schemes can be implemented through a single trust

e) The trust deed, under which the trust is formed, shall contain provisions as specified in Part A of Schedule – I of these regulations

     2. Filing of the Trust Deed made for implementation of Employee Benefit Scheme (Regulation 3(3))

The trust deed made for implementation of Employee Benefit Scheme and any modifications thereto shall be mandatorily filed with the recognised stock exchange(s) in India where the shares of the company are listed.

3. Appointment of Trustee for the Trust created for implementation of Employee Benefit Scheme (Regulation 3(4))

A person can be appointed as trustee of a trust, unless they are:

a) A director, KMP or promoter of company or group companies (incl. holding, subsidiary, or associate companies), or a relative of such individuals or

b) Beneficially hold 10% or more of paid-up share capital or voting rights of company

Where individual(s) or “one person company” as defined under the Companies Act, 2013 is appointed as trustee(s), there shall be a minimum of two such trustees, and in case a corporate entity is appointed as a trustee, then it may be the sole trustee.

4. Duties of the Trustees (Regulation 3(5)-(9), (16))

i) Trustees of a trust shall not vote in respect of the shares held by such trust

ii) Trustee should ensure that requisite approval from shareholders has been obtained by company in order to enable the trust to implement scheme(s) and undertake secondary acquisition for the purposes of scheme(s).

iii) The trust shall not deal in derivatives and shall undertake only delivery-based transactions for the purposes of secondary acquisition as permitted by these regulations.

iv) Subject to Companies Act 2013 & Companies (Share Capital and Debenture) Rules, 2014,the company may lend monies to the trust on appropriate terms and conditions to acquire the shares either through new issue or secondary acquisition, for the purpose of implementation of the scheme(s).

v) For the purpose of disclosures to the recognised stock exchange, the shareholding of the trust shall be shown as “non-promoter and non-public” shareholding

vi) The trust shall be required to make disclosures and comply with the other requirements applicable to insiders or promoters under the SEBI (Prohibition of Insider Trading) Regulations, 2015 or any modification or re-enactment thereto.

     5. Obligations of the Trust in case of secondary acquisition (Regulation 3(10)-(13))

Secondary acquisition in a financial year by the trust shall not exceed two per cent of the paid up equity capital of the company as at the end of the previous financial year.

i)The trust’s total shares from secondary acquisitions must not exceed the following limits as a percentage of the company’s paid-up equity capital at the end of the financial year prior to shareholder approval:

• • Part A, B, or C schemes: 5%
  • Part D or E schemes: 2%
  • Total across all schemes: 5%

ii) Unappropriated shares acquired through secondary acquisition under Part A, B, or C of Chapter III must be appropriated within a reasonable period, not exceeding the end of the next financial year. With approval from the compensation or nomination and remuneration committee, this period may be extended to the following financial year.

iii)Trust shall be required to hold the shares acquired through secondary acquisition for a minimum period of six months except where they are required to be transferred in circumstances enumerated in clause (b) of sub-regulation (14), whether off-market or on platform of recognised S.E

6. Cases where Trust can undertake off-market transfer of shares (Regulation 3(14))

Trust shall be permitted to undertake off-market transfer of shares only for:

a) transfer to employees pursuant to scheme(s)

b) while participating in open offer under SAST Regulations or while participating in a buy-back, delisting or any other exit offered by company generally to its shareholders

     7. Trust not to sell the shares in secondary market (Regulation 3(15))

The trust shall not become a mechanism for trading in shares and hence shall not sell the shares in secondary market

The trust can sell shares in the following cases:

a) To help an employee pay for the exercise price, taxes, and related expenses under ESOS.

b) Upon vesting or exercise of SAR under Part C of Chapter III.

c) In emergencies for implementing schemes under Part D and E, with the trustee recording reasons and ensuring proceeds are used within the scheme’s timeframe.

d) To participate in buybacks, open offers, delisting offers, or other exits provided by the company.

e) To repay a loan if shares are not appropriated within the specified timeline

f) For winding up of schemes.

g) Based on Board approval for schemes under Part A, B, or C, upon payment of a non-refundable fee of ₹1 lakh.

     8. Eligibility of an employee to participate in share benefit schemes proposed by the Company (Regulation 4)

An employee shall be eligible to participate in the schemes of the company as determined by the compensation committee.

In cases where an employee is appointed as a director on the Board of a company, nominated by an institution as its representative:

i) The contract between the institution and the appointed director must include:

• • Whether the director can accept grants from the company under its schemes.
  • A provision that any grants made to the director cannot be transferred to the institution.
  • The conditions under which the director can accept fees, commissions, or other incentives from the company.

ii) The institution must submit a copy of the agreement to the company, which will then file it with all recognized stock exchanges where the company’s shares are listed

iii) The appointed director must present a copy of the contract at the first board meeting they attend after being nominated.

9. Company to constitute a Compensation Committee for administration of employee benefit schemes (Regulation 5)

A company shall constitute a compensation committee for administration and superintendence of the schemes. Provided that where the scheme is being implemented through a trust the compensation committee shall delegate the administration of such scheme(s) to the trust

i) The compensation committee shall be a committee of such members of the B.O.D of the company as provided under regulation 19 of the SEBI (LODR) Regulations, 2015. A company may also opt to designate its nomination and remuneration committee as the compensation committee for the purposes of these regulations.

ii) The compensation committee shall, inter alia, formulate the detailed terms and conditions of the schemes which shall include the provisions as specified in Part B of Schedule – I of these regulations.

iii) The compensation committee shall frame suitable policies and procedures to ensure that there is no violation of securities laws including SEBI (Prohibition of Insider Trading) Regulations, 2015 and the SEBI(Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003, by the trust, the company and its employees, as may be applicable.

10. Prior approval of shareholders before launching any Share benefit scheme (Regulation 6)

No scheme shall be offered to employees of a company unless the shareholders of the company approve it by passing a special resolution in the general meeting.

i) Explanatory statement to the notice and the resolution proposed to be passed by shareholders for the schemes shall contain the information as specified in Part C of Schedule – I of these regulations or as specified by the Board.

ii) Approval of shareholders by way of separate resolution in the general meeting shall be obtained by the company in case of:

• • Secondary acquisition for implementation of the schemes.
  • Secondary acquisition by the trust in case of capital expansion
  • Grant of option, SAR, shares or other benefits, as the case may be, to employees of subsidiary or holding company

• • Grant of option, SAR, shares or benefits, as the case may be, to identified employees, during any one year, equal to or exceeding one per cent. of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of option, SAR, shares or incentive, as the case may be.

11. Variation of terms of the schemes (Regulation 7)

A company may by special resolution of its shareholders vary the terms of the schemes 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 interests of the employees

i) A company can vary the terms of the schemes to meet any regulatory requirement without seeking shareholders’ approval

ii) The provisions of regulation 6 of these regulations shall apply to such variation of terms as they apply to the original grant of option, SAR, shares or other benefits, as the case may be.

iii) Notice for passing a special resolution for variation of terms of the schemes shall disclose full details of the variation, the rationale therefor, and the details of the employees who are beneficiaries of such variation.

iv) A company may reprice the options, SAR or shares, as the case may be, which are not exercised, whether or not they have been vested, if the schemes were rendered unattractive due to fall in the price of the shares in the stock market. Company to ensure that such repricing is not detrimental to the interests of the employees and approval of the shareholders by a special resolution has been obtained for such repricing

   12. Winding up of the schemes (Regulation 8)

In case of winding up of the schemes being implemented by a company, the excess monies or shares remaining with the trust after meeting all the obligations, if any, shall be utilised for repayment of loan or by way of distribution to employees or subject to approval of the shareholders, be transferred to another scheme under these regulations, as recommended by the compensation committee.

13. Non-transferability of Option, SAR or any other benefit granted to employee (Regulation 9)

Options, SARs, or any other benefits granted to an employee under the regulations are non-transferable. Only the employee to whom they are granted is entitled to the benefits.

i) For ESOS or SAR, the company or trustee may allow stock brokers to fund the employee’s exercise price, taxes, and related expenses, with adjustments made against the sale proceeds of the shares.

ii) Options, SARs, or any benefits granted to an employee cannot be pledged, mortgaged, or transferred.

iii) If an employee dies while employed, all unvested options, SARs, or benefits will vest in their legal heirs or nominees from the date of death.

iv) If an employee becomes permanently incapacitated, all unvested options, SARs, or benefits will vest on the date of incapacity.

v) Upon resignation or termination, any unvested options, SARs, or benefits will expire.

vi) If an employee is transferred or deputed to an associate company before vesting or exercise, the vesting and exercise terms will continue.

vii) In case of a transfer due to an arrangement, amalgamation, merger, or demerger, the treatment of options will be specified to protect the employee’s interests.

14. Listing of new shares under share benefit scheme (Regulation 10)

In case a new issue of shares is made under any scheme, shares so issued shall be listed immediately on all recognised stock exchange(s) where the existing shares are listed

The new shares to be listed under any scheme subject to following conditions:
a) Scheme to be in compliance with the regulations

b) A statement, as specified in Part D of Schedule – I of these regulations, is filed and the company obtains an in-principle approval from the recognised stock exchange(s)

c) As and when an exercise is made, the company notifies the concerned recognised stock exchange(s) as per the statement as specified in Part E of Schedule – I of these regulations.

  15. Schemes implemented by unlisted companies (Regulation 11)

The shares arising after the IPO of an unlisted company, out of options or SAR granted under any scheme prior to its IPO to the employees, shall be listed immediately upon exercise on all the recognised stock exchanges where the shares of the company are listed subject to compliance with the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 and wherever applicable, sub regulation (1) of regulation 12 of these regulations.

16. Conditions subject to which grant of shares can be made under any scheme formulated prior to IPO (Regulation 12(1),(2))

No company shall grant shares to employees under any pre-IPO scheme unless:

(i) The scheme complies with these regulations, and

(ii) It is ratified by shareholders after the IPO. Ratification may occur anytime before the grant of new options, shares, or SARs under the scheme.

No change shall be made in the terms of options or shares or SAR issued under such pre-IPO schemes, whether by repricing, change in vesting period or maturity or otherwise unless prior approval of the shareholders, by way of special resolutions, is taken for such a change, except for any adjustments for corporate actions made in accordance with these regulations.

17. Prior In-principle approval of the Stock exchange before grant of options/SARs (Regulation 12(3))

For listing of shares issued pursuant to ESOS, ESPS or SAR, the company shall obtain the in-principle approval of the recognized stock exchanges where it proposes to list the said shares prior to the grant of options or SARs

18. Disclosure of cost incurred by holding co. for issuing option/share/SAR/benefits to subsidiary employees (Regulation 12(4),(5))

When the holding company issues option, share, SAR or benefits to the employees of its subsidiary, the cost incurred by the holding company for issuing such option, share, SAR or benefits shall be disclosed in the ‘notes to accounts’ of the financial statements of the subsidiary company.

19. Appointment of Merchant Banker for implementation of employee benefit schemes (Regulation 12(6))

The company shall appoint a merchant banker for the implementation of employee benefit schemes till the stage of obtaining in-principle approval from the recognized stock exchanges.

20. Certificate from Secretarial Auditors for implementation of share benefit scheme as per regulations (Regulation 13)

At each AGM, the Board of Directors must present a certificate from the secretarial auditors confirming that the employee share benefit scheme(s) have been implemented in accordance with SEBI(Share Based Employee Benefits and Sweat Equity) Regulations, 2021 and the company’s resolution.

21. Disclosure of employee benefit schemes being implemented (Regulation 14)

In addition to the information that a company is required to disclose in relation to employee benefits under the Companies Act, 2013, the Board of Directors of such a company shall also disclose the details of the scheme(s) being implemented, as specified in Part F of Schedule-I of the regulations

22. Disclosure requirements of the accounting standards (Regulation 15)

Any company implementing any share based schemes shall follow the disclosure requirements of the Accounting Standards prescribed by Central Government in terms of section 133 of Companies Act, 2013 including any ‘Guidance Note on Accounting for employee share based Payments’ issued in that regard

23. Rights of Promoter Employees to retain & exercise ESOPs granted prior to Draft Offer Document Filing (Regulation 9A)

An employee who is identified as a “promoter” or part of the “promoter group” in the draft offer document filed by a company with the Board in relation to an initial public offering, and who was granted options, SAR or any other benefit under any scheme at least one year prior to filing of the draft offer document, shall be eligible to continue to hold and/or exercise such options, SAR or any other benefit, in accordance with its terms and subject to compliance with these regulations and other applicable laws.

Penalty & Punishment

• Section 15HB of SEBI Act, 1992:

Penalty for contravention where no separate penalty has been provided:-Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one crore rupees

• U/s 15A(b) of SEBI Act 1992: Penalty for failure to furnish information, return, etc. –

If any person, who is required under this Act or any rules or regulations made thereunder to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations or who furnishes or files false, incorrect or incomplete information, return, report, books or other documents, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees