As per Rule 19(2)(b) and 19A of the Securities Contracts (Regulation) Rules, 1957 (“SCRR”), read with Regulation 38 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”), the companies listed on the stock exchange(s) are required to comply with Minimum Public Shareholding (“MPS”) requirements. As per the provisions mandated by the Securities and Exchange Board of India (“SEBI”), MPS refers to the minimum percentage of a company’s total issued and paid-up equity share capital that is mandatorily required to be held by the public shareholders other than the promoter, promoter group, and any other specified categories. This regulation ensures that a certain portion of a listed company’s ownership is distributed amongst the public which promotes transparency, liquidity, and wider public participation in the stock market.

SEBI mandated an MPS of 25% for all the listed companies i.e., at least 25% of a company’s total issued shares must be held by the public shareholders within a timeframe of three years from the date of listing of shares. MPS can be achieved by the companies either through stake sales to public investors or by adopting methods like Offer for Sale (“OFS”), Institutional Placement Programme (“IPP”), or other approved means.

After receiving requests seeking permission to use different methods from listed companies and various stakeholders, to offer relaxation in MPS conditions, SEBI undertook a comprehensive review of the existing norms, leading to an amendment vide Circular No SEBI/HO/CFD/PoD2/P/CIR/ 2023/18 dated February 03, 2023 (“Circular”), aimed at providing relaxation in meeting the MPS requirements. 

Among alternatives of various existing methods, the approach involving utilization of employee stock options (“ESOPs”) to achieve MPS underwent significant changes. The revised guidelines now allow listed companies to achieve prescribed MPS threshold by allotting shares to employees upon exercise of ESOPs. However, the relief facilitated through ESOPs is capped at a maximum of 2% of the company’s paid-up equity share capital subject to two pre-requisites namely:

  1. that any ESOP scheme under which shares are issued to employees must be in compliance with the provisions of Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“SBEB Regulations”); and
  2. such shares must not be allotted to the promoter(s) or persons belonging to promoter group of the listed company under such ESOP scheme.

By the way, under the existing provisions of SBEB Regulations, ESOPs cannot be granted nor shares can be issued to the promoter(s), their relatives and persons belonging to the promoter group.

The Stock Exchange(s) shall monitor the methods adopted by the listed entities to increase their public shareholding and comply with the MPS requirement in terms of this Circular. Non-compliance, if any, observed by the Stock Exchange(s) with respect to the method(s) and / or conditions prescribed therein, shall be reported to SEBI on a quarterly basis.

Our observations

It is a welcome move by SEBI. Now, achievement of MPS up to 2% of the company’s equity capital is possible by way of implementing an ESOP scheme contemplating primary shares and issue of shares thereunder to the employees upon exercise. Administering the ESOP scheme directly or through a trust is not decisive.  

This Circular seems to create win-win particularly for the employees on one hand and also for the promoters on the other. Whereas, employees are expected to gain from an equity compensation program, the promoters would be able to achieve the MPS threshold, the company management may achieve the objectives of employee attraction, retention and motivation for higher productivity and corporate growth that are conducive for all the stakeholders.

However, the phrase “employee stock option (ESOP) scheme” used in the Circular may create doubts as to whether a listed company wishing to issue shares to the eligible employees through an employee stock appreciation rights (“SAR”) scheme, or an employee stock purchase scheme (“ESPS”) implemented in due compliance with the SBEB Regulations could take the benefits of this Circular. In other words, whether the term ESOP used in the Circular deems to include SAR and ESPS. Clarity in this regard may prove even more beneficial for a wider cross-section of listed companies in India and also for their respective employees.  

Disclaimer: Our views in this compilation are matter of our understanding/ interpretation of the subject and relevant legal/ regulatory provisions. Being a bona fide compilation, we disclaim any liability of whatsoever nature towards any reader or other person unless expressly agreed to by us in writing.