Contract workers of listed companies may soon have stock benefits

Sebi plans to tweak the definition of 'employee' by deleting permanent from it; to merge sweat equity rules

Workers hired on contract by listed companies may soon become eligible for stock-related employee benefits, including stock-option plans.

Currently permanent employees, directors, and executives are eligible for such allotments.

However, promoters and independent directors will remain ineligible for employee benefits.

The move will be a shot in the arm for start-ups and technology companies that hire consultants at middle levels.

According to sources, the Securities and Exchange Board of India (Sebi) is planning to tweak the definition of “employee” under stock-related employee-benefit regulations by removing the word “permanent” from them.

Further, the regulator is contemplating the merger of sweat equity regulations with employee-benefit rules. This is to avoid duplication and overlapping, said a person privy to the development.

These follow the changes proposed by an expert panel, which has reviewed the framework of share-based employee benefits and the issue of sweat equity.

The regulator will seek public comments through a consultation paper, which is likely to be out early next month, said another source. According to him, companies have been facing issues with the word “employee” because it doesn’t provide eligibility to those on contract. This is a hindrance to attracting talent.

Sebi’s stock-related employee-benefit measures enable listed companies to reward their employees through stock options and stock-purchase schemes.

Experts say the move would suit the changing dynamics of employment, particularly the way unicorns and start-ups are functioning and their need for skilled workers for specific periods and also for those who ensure that everyone in the company should strive hard.

“This move will help listed companies attract specialised talent and build a sense of ownership in workers even if they are for a short term. Benefit schemes for employees, including Esops (employee stock option plans), have gained importance, particularly for new-edge companies and start-ups,” said Sudhir Bassi, executive director, Khaitan & Co.

In the case of sweat equity, experts say since this is also part of the compensation, combining it with employee-benefit regulations would make things simple. 

Sweat equity shares are generally issued to employees at a discount or for consideration other than cash. However, unlike stock options, sweat equity has a lock-in period of three years.

Even after merging the two, the three-year lock-in will be carved out because the aim is to reduce compliance burden and remove the hassles companies face, source cited above said. 

Sebi in early November had formed a seven-member expert group under the chairmanship of Sandip Bhagat, partner at S&R Associates, to revisit the framework of share-based employee benefits and suggest changes.

They have to suggest whether it is advisable to combine the regulations. In case these can be combined, the panel will provide draft rules on those.

Other members of the panel are Santosh Haldankar, company secretary of HDFC Bank; Vikram Shroff of Nishith Desai Associates; Narayan Shankar, company secretary of Mahindra & Mahindra; Pavan Vijay, founder of Corporate Professionals; M Sanaulla Khan, company secretary of Wipro; and Sebi’s Chief General Manager Jeevan Sonparote.