SEBI Relaxes Sweat Equity Rules For Startups Listed On IGP

SUMMARY

Sweat Equity shares are equity shares issued to the directors or any other employee of the company, at a reduced price or for considerations (other than cash)

--In the case of IGP-listed companies, the yearly limit for sweat equity shares will be 15%, while the overall limit will be 50% of the paid-up capital at any time

--Under the new rules, the companies will have flexibility in switching the administration of their schemes from the trust route to the direct route and vice versa with the approval of the shareholders

Markets regulator Securities and Exchange Board of India (SEBI) has relaxed the quantum of sweat equity that can be issued by new-age technology companies listed on the Innovators Growth Platform (IGP).

Sweat Equity shares are equity shares issued to the directors or any other employee of the company, at a reduced price or for considerations (other than cash) such as contributing to the growth and success of the company through value additions, or contribution in nature of the IPR.

The regulatory body has merged two sets of regulations- namely(Share Based Employee Benefits) Regulations, 2014, or SBEB, and Sebi (Issue Of Sweat Equity) Regulations, 2002 — that deal with employee compensation — into a single regulation Sebi (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.

In the case of IGP-listed companies, the yearly limit for sweat equity shares will be 15%, while the overall limit will be 50% of the paid-up capital at any time, SEBI said in a notification on August 13. For companies trading on the mainboard, the annual sweat equity ceiling will also be 15%, but the overall limit will be capped at 25%.

This enhanced overall limit will be applicable for 10 years from the date of the company’s incorporation.

“The issue of sweat equity shares to employees who belong to promoter or promoter group shall be approved by way of a resolution passed by a simple majority of the shareholders in the general meeting,” SEBI wrote.

Under the new rules, the companies will have flexibility in switching the administration of their schemes from the trust route to the direct route and vice versa with the approval of the shareholders.

However, this is subject to the condition that the switch is not against the interest of the employees.

SEBI noted that the time period for appropriating the unappropriated inventory of the trust has been extended from existing one year to two years, subject to the approval of the compensation or nomination and remuneration committee for such extension.

The regulator has dispensed with the minimum vesting period and lock-in period for all share benefit schemes in the event of death or permanent incapacity (as defined by the company) of an employee.

In relation to sweat equity, the lock-in period for sweat equity shares and its pricing formula will be consistent with the ICDR (Issue of Capital and Disclosure Requirements) Regulations. The amendment came after the board of SEBI approved a proposal in this regard earlier this month.

The sweat equity shares issued by a listed company shall be eligible for listing subject to their issuance being in accordance with these regulations. These measures have been taken by SEBI at a time when an increasing number of startups are applying for public listing.

In July, the seven-member group constituted by SEBI had made several policy recommendations, including that non-permanent staffers should be considered eligible to receive share-based employee benefits.