15 December 2021
Background:
The Securities and Exchange Board of India had notified the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“New SEBI ESOP Regulations”), on August 13, 2021. The New SEBI ESOP Regulations govern all share-based employee benefit schemes dealing in securities, including employee stock options, employee share purchase, stock appreciation rights, general employee benefits and retirement benefits (“Share Based Benefit Schemes”). The New SEBI ESOP Regulations also include regulations on sweat equity shares.
The New SEBI ESOP Regulations were introduced pursuant to the submission made by an expert group to SEBI, dated June 18, 2021, on SEBI (Share Based Employee Benefits) Regulations, 2014 (“Earlier SBEB Regulations”), and the SEBI (Issue of Sweat Equity) Regulations, 2002. The aim was to streamline and rationalise the provisions of these regulations, make them more robust, sync them with best global practices and provide ease of doing business.
On November 16, 2021, SEBI issued Frequently Asked Questions (“SEBI FAQs”) to clarify key concepts under the New SEBI ESOP Regulations. Based on the SEBI FAQs, we have analysed one key aspect in this article, i.e. the widened definition of ‘employee’ under the New SEBI ESOP Regulations and its practical impact.
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of the term ‘permanent’ from the definition of employee
Prior to the deletion of the term ‘permanent’, there was uncertainty on whether non-permanent employees, such as contract employees, could be considered as employees and be eligible to receive benefits under Share Based Benefits Scheme. As per the Earlier SBEB Regulations, an employee was defined to mean only a ‘permanent’ employee, thus restricting non-permanent employees from participating in Share Based Benefit Schemes.
However, companies across the globe have started employing non-permanent employees and coming up with dynamic work arrangements. In India, although the concept of gig workers, which includes direct contractors, has been prevalent for a long time, however, due to the pandemic and increase in government initiatives such as Start-up India, Skill India, etc., the gig economy is growing at a rapid pace. As per the Economic Survey 2020-21, India has emerged as one of the largest markets in terms of flexi staffing and its gig economy is now among the biggest in the world.[1] Further, according to a report titled, ‘The Rising of Gig Economy in India’ (2021) by Associate Chamber of Commerce and Industry of India and Primus Partners (ASSOCHAM Report)[2], the concept of gig economy in different sectors (usually in creative fields such as content creation, social media, etc.) has increased, with 36% of United States workers engaged in the gig economy and around 15 million gig workers engaged in various sectors, including information technology, human resources, designing, etc. Further, as per the BCG Report[3], the potential and need for gig-based employment is so relevant that the gig economy could create approximately 1 million net new jobs over the next two-three years.
Thus, in order to meet the changing work arrangements post pandemic and to give companies the flexibility to determine the categories of employees they would want to cover under the Share Based Benefit Schemes, the expert group recommended that instead of adding each category of employee that could be covered within the definition of employee, the term ‘permanent’ be deleted.
Based on the expert group’s recommendation, the New SEBI ESOP Regulations now allow non-permanent employees, working exclusively for the company (or exclusively working for a group company of such company), such as contractual employees, gig workers, etc., to receive share-based employee benefits. The SEBI FAQs clarify that Share Based Benefit Schemes can be extended to employees, irrespective of the employee being employed in India or outside India, as long as he/ she works ‘exclusively’ for the company. Further, the SEBI FAQs have clarified that contractual employees will also be covered by the New SEBI ESOP Regulations.[4]
Inclusion of employees of ‘associate’ and ‘group’ companies
Under the Earlier SBEB Regulations, only employees of the company adopting the Share Based Benefit Scheme and employees of the holding and subsidiary companies were eligible to receive benefits under the Share Based Benefit Scheme.
However, the definition of ‘employee’ under the New SEBI ESOP Regulations has been expanded, and now listed companies can provide Share Based Benefit Schemes to employees, who are exclusively working for a listed company or any of its ‘group’ company, including a subsidiary or associate company, or holding company. The New SEBI ESOP Regulations include specific reference to employees of a ‘group company’ and ‘associate company’.
Associate company: Under the Earlier SBEB Regulations, the term ‘associate’ was included. However, in 2015, the reference to associate company was deleted to bring the definition of employee in line with the amendment to the Companies (Share Capital and Debentures) Rules, 2014 (“Rules”), which excluded employees of associate companies from receiving shared based benefits. Now, pursuant to the New SEBI ESOP Regulations, employees of an ‘associate’ company of the listed company are also eligible to receive share-based employee benefits. The SEBI FAQs further clarify that employees of joint ventures are also eligible to receive benefits under the Share Based Benefit Schemes, subject to shareholders’ approval.[5]
Group company: The term ‘group’ has been included for the first time under the New SEBI ESOP Regulations to mean two or more companies which, directly or indirectly, are in a position to:
(i) exercise 26% or more of the voting rights in the other company;
(ii) appoint more than 50%of the members of the board of directors in the other company; or
(iii) control the management or affairs of the other company.
Through the addition of the term ‘group’, group companies will now be able to formulate common Share Based Benefit Schemes across its group. Further, the term working ‘exclusively’ for a company will include employees working exclusively for a group company of the listed company.
For instance, based on the definition of ‘group’ under the New SEBI ESOP Regulations, if there are two companies (Company A and Company B), which together hold 26% of the share capital of a listed company (Company X), Company X can now grant Share Based Employee Benefits to the employees of Company A and Company B even if Company A and Company B are not part of the same group. Further, even Company A and Company B can extend Share Based Benefit Schemes to employees of Company X. However, Company A and Company B cannot grant such benefits to each other’s employees as they are not part of the same group.[6]
Therefore, vide this amendment, companies will now be able to extend Share Based Benefit Schemes to a larger pool of employees.
Thus, by expanding the scope of employees to include ‘group’ companies, it has become easier for a significant number of large conglomerates in India to extend Share Based Benefit Schemes across the group, who earlier due to complex holding structures, did not satisfy the holding company or subsidiary company requirements.
Position with respect to unlisted companies
The New SEBI ESOP Regulations only apply to listed companies whereas unlisted companies are still regulated under Section 62(1)(b) of the Companies Act, 2013, read with Rule 12 of the Rules, which covers within its ambit only permanent employees and does not include employees of associate or group companies. Thus, the Companies Act, 2013, provides a narrower definition than the definition provided under the New SEBI ESOP Regulations.
In this context, the SEBI meeting on ‘Proposed New SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, had made a reference to the Ministry of Corporate Affairs to consider modifying the definition of employee to bring it in line with the New SEBI ESOP Regulations.[7] However, the definition under the Rules has not been amended and continues to remain narrower than the New SEBI ESOP Regulations.
Therefore, it becomes important for unlisted companies that are proposing to undertake an initial public offering to review the terms of their Share Based Employee Benefit Schemes so as to ensure that they bring the definition of employee in consonance with New SEBI ESOP Regulations and tread the water carefully at the time of filing the draft red herring prospectus, i.e. when they have to comply with the requirements of both the Companies Act, 2013, and the New SEBI ESOP Regulations.
Conclusion
Share Based Employee Benefit Schemes have been a conventional method of incentivising employees and retaining appropriate talent. With evolving traditional concepts, it has become imperative that companies reward their employees in a manner that aligns with their long-term interests. The primary objective of the New SEBI ESOP Regulations is to make the regulations more employee-friendly and provide flexibility to companies to formulate plans that are more aligned with their needs.
The deletion of the word permanent from the definition of employee gives companies the flexibility to extend Share Based Benefit Schemes to even non-permanent employees who work exclusively for the company. This is an important change as it keeps pace with the emerging trend of companies employing contract employees and other forms of non-permanent employees. Additionally, the inclusion of the terms ‘associate’ and ‘group’ companies ensure that Share Based Employee Benefit Schemes are extended to a larger pool of employees and provide ease to group companies.
For further information, please contact:
Bharat Reddey, Partner, Cyril Amarchand Mangaldas
bharath.reddy@cyrilshroff.com
[1] Economic Survey 2020-21, India’s Gig economy now among largest in the world, Economic Times, January 29, 2021 (can be accessed at: https://economictimes.indiatimes.com/tech/technology/economic-survey-2020-21-indias-gig-economy-now-among-largest-in-the-world/articleshow/80586505.cms).
[2] Associate Chamber of Commerce and Industry of India and Primus Partners Report (2021) (can be accessed at: https://www.primuspartners.in/wp-content/uploads/2021/02/Gig-Economy-Report.pdf).
[3] BCG Report, Unlocking the Potential of the Gig Economy in India (can be accessed at: https://media-publications.bcg.com/India-Gig-Economy-Report.pdf).
[4] SEBI FAQ No. 5.
[5] SEBI FAQ no. 7.
[6] SEBI FAQ no. 6.
[7] Proposed New SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (can be accessed at: https://www.sebi.gov.in/sebi_data/meetingfiles/sep-2021/1631782594051_1.pdf ).
