Sebi notifies relaxed sweat equity rules for new-age technology companies

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Markets regulator Securities Exchange Board of India (Sebi), has given relaxations on the quantum of sweat equity that can be issued by new-age technology companies listed on the Innovators Growth Platform. The development came at a time when many startups are attracting significant investments, including from overseas.

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 dated August 13.

This enhanced overall limit will be applicable for 10 years from the date of the company’s incorporation. For companies trading on the mainboard, the annual sweat equity ceiling will also be 15%, but the overall limit will be capped at 25%.

Employees related to promoters could get sweat equity shares

The markets watchdog has merged two sets of regulations into one (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.

Sweat equity refers to shares issued by a company to its employees for non-cash consideration. Startups and promoters typically use sweat equity to fund their companies.

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.

“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 general meeting,” Sebi said.

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

Sebi said 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 comes after the board of Sebi approved a proposal in this regard earlier this month. In July, the seven-member group constituted by Sebi had made several policy recommendations, including non-permanent staffers should be considered eligible to receive share-based employee benefits.