SEBI recently issued two informal guidances in response to queries raised by Mindtree Limited and Saregama India Limited. The queries raised by the two companies were in relation to employee benefit schemes called the “Phantom Stock Scheme” granted to their employees. Mindtree granted Stock Appreciation Right (“SAR”) units to 6 employees who are also promoters of the company, while Saregama granted certain SAR units to its managing director. As per the scheme, notional SAR units were issued at a pre-determined grant price and the promoters/MD were entitled to receive cash payment for appreciation in the share price over the grant price for the awarded units, based on the company achieving the specified revenue targets. The scheme, however, did not involve any actual purchase or sale of shares of the company. The issue involved here was whether the Phantom Stock Scheme fell within the purview of the SEBI (Share Based Employee Benefits) Regulations, 2014 (“SBEB Regulations”) and whether issuance of SAR units to promoters of the company, who were also employees is fully compliant with the SBEB Regulations. Saregama, in addition to queries raised by Mindtree, also raised a query as to whether such phantom options could be granted to its managing director.

SEBI in its response stated that the provisions of the SBEB Regulations applied to a scheme involving dealing in or subscribing to or purchasing securities of the company, directly or indirectly. Since the Phantom Stock Scheme did not involve any actual purchase or sale of equity shares of the company, SEBI held that the SBEB Regulations “may not apply to the instant Phantom Stock Scheme”. Since the Phantom Stock Scheme did not fall within the purview of the SBEB Regulations the other queries posed by them as to whether the same could be granted to promoters or the managing director became irrelevant and SEBI did not answer them.

It has to be noted that while Regulation 1(3)(iii) of the SBEB Regulations provides that it applies to stock appreciation rights schemes, in light of the response given by SEBI in these two cases, the SBEB Regulations shall not apply to those stock appreciation rights schemes that do not involve dealing in or subscribing to or purchasing securities of the company, directly or indirectly.