Informal Guidance to proposed to be listed company – Extending share based employee benefits to employees of a subsidiary company

Q1. To whom is this informal guidance given by SEBI and it is on what provision that company is seeking informal guidance?

SEBI has given informal guidance to a company named ‘Kids Clinic India Ltd’ [Company]. It is interpretative informal guidance where SEBI has given its view on who will be categorized as “eligible employee” as per Section 2(1)(i) of Share Based Employee Benefit Regulations, 2021 [SBEB 2021] for availing share based employee benefits.

Q2. What are the facts of this case in brief?

Kids Clinic India Ltd has an ESOP Plan 2013 which was framed when the Company was a private company.

Now as the Company has filed a draft red herring prospectus with SEBI for listing its shares on February 10, 2022 Company has changed its ESOP Plan 2013 in accordance with SBEB 2021.

The company currently engages specialist doctors, on a consultancy basis, to provide professional services for maternity, neonatology, and Paediatrics. Acquity Labs Private Ltd [‘Subsidiary’] is 51% subsidiary of the Company. The company is planning to employ doctors to provide their expert advisory in the field of pathology at the Subsidiary level.

These doctors will work exclusively for the Subsidiary for defined working hours. Post working hours if their services are required Company would engage with them on a consultancy basis to provide professional services for a certain number of hours outside their defined working hours for the Subsidiary.

These doctors would be exclusively employed by Subsidary and they will be providing services to Subsidiary and Company including the group as a whole.

Further Company also stated that these doctors may separately carry on their private clinic outside their committed time of employment/ engagement with the Subsidiary/ Company as a group.

Q3. What was the question on which company sought Informal Guidance?

The company has sought guidance from SEBI as to whether these doctors who would be exclusively employed by the Subsidiary i.e. who would be eligible employees of the Subsidiary, could be eligible for employee stock options as per ESOP Plan 2013 framed in accordance with SBEB 2021.

Q4. What are the provisions that are referred by SEBI while giving this informal guidance?

SEBI referred to the ESOP Plan 2013, Reg 2(1)(i) of SBEB 2021 and FAQ no. 5 on SBEB 2021. Defintion of Employee as per ESOP Plan 2013 and SBEB 2021 was same, which is as follows, employee”, except in relation to issue of sweat equity shares, means, — (i) an employee as designated by the company, who is exclusively working in India or outside India; or (ii) a director of the company, whether a whole time director or not, including a non-executive  director  who  is  not  a  promoter  or  member  of  the  promoter  group,  but excluding an independent director; or (iii) an employee as defined in sub-clauses (i) or (ii), of a group company including subsidiary or its associate company, in India or outside India, or of a holding company of the company, but does not include—(a) an  employee  who  is  a  promoter  or  a  person  belonging  to  the  promoter group; or (b) a director who, either himself or through his relative or through any body corporate,  directly  or indirectly,  holds  more  than  ten  per  cent  of  the outstanding equity shares of the company;

Q5: Whether contractual employees are eligible to receive benefits under Share Based Employee Benefits schemes?

Yes, contractual employees are also eligible to receive benefits under the Share Based Employee Benefits schemes provided they are designated as employees by their employers and are exclusively working with such company or its group company including subsidiary or its associate company or its holding company.     

Q6. What was SEBI’s view on the question posed by the Company for Informal Guidance?

As per Regulation 2(1)(i) read with (iii) it is clear that an employee as designated by the Company, who is exclusively working in India or outside India and is working for the Company/ its Subsidiary / associate or group company would be eligible for stock options as per SBEB 2021. SEBI further stated that they have vide their FAQ no. 5 has stated that employee includes contractual employee who is exclusively engaged by a company or its group company.

Further SEBI also emphasized that this view is given on the facts presented by the Company that the doctors would be employed exclusively by the Subsidiary and provide services to the group (i.e. the Company and Subsidiary) and there shall be no employer – employee relationship with any other entity or company outside the group.

Therefore, the said employees would be eligible for a grant of share based employee benefits as SBEB 2021 if designated as exclusively employed with Subsidiary.

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