SEBI Compliance Requirements for Long-Term Incentive Plans (LTIPs) in Listed Companies

What is a Long-Term Incentive Plan (LTIP)?

A Long-Term Incentive Plan (LTIP) is a compensation program used by companies to reward employees beyond basic salary. 

As the name suggests, LTIPs are structured to reward employees for the company’s long-term performance, often measured through financial or stock-based metrics, and for their continued service, aligning employee incentives with sustained business growth.

In practice, LTIPs are widely adopted in public companies and typically measure performance and pay out over 3-5 years.

Types of Long-Term Incentive Plans (LTIPs)

Long-Term Incentive Plans (LTIPs) have two main categories: equity-based and cash-based incentives. 

Equity-based LTIPs include instruments like Employee Stock Option Scheme (ESOS), Restricted Stock Units (RSUs) and Stock Appreciation Rights (SARs). These plans offer employees ownership or value linked to the company’s shares, to encourage long-term association. Cash-based LTIPs, on the other hand, provide monetary rewards.

Listed companies predominantly use equity-based LTIP awards, but can also include cash-based components.

Regulatory frameworks governing Long-Term Incentive Plans (LTIPs) in listed companies

Multiple legal frameworks govern the issuance of LTIPs by listed companies in India. Key laws and guidelines that companies must follow when implementing LTIPs are as follows:

SEBI regulations

Listed companies in India must comply with the SEBI (Share-Based Employee Benefits and Sweat Equity) Regulations, 2021, when implementing any employee benefit scheme involving company shares.

Companies Act, 2013

Indian companies issuing ESOPs must follow the Companies Act, 2013. Unlisted companies must additionally comply with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.

Income Tax Act, 1961

Employees pay tax on LTIP income as a perquisite (salary income) on the date of share allotment or transfer after exercising the option as per the Income Tax Act 1961. The taxable value equals the fair market value of the allotted shares minus the exercise price. Employers deduct TDS on this perquisite from the employee’s salary.

Accounting Standards

Under Indian Generally Accepted Accounting Principles (GAAP), companies must account for share-based LTIPs using the Guidance Note on Accounting for Employee Share-based Payments issued by ICAI. Once Ind AS becomes applicable, this is replaced by Ind AS 102.

Key SEBI compliance requirements for Long-Term Incentive Plans (LTIPs)

Listed companies must follow a well-defined compliance process under SEBI’s regulations to issue LTIPs such as ESOPs, RSUs, or SARs. 

a. Mode of implementation

Listed companies can implement LTIP schemes either directly or through an irrevocable trust. If a trust is used, the company must decide this mode upfront while seeking shareholder approval. 

Any change in the implementation mode later requires fresh shareholder approval via a special resolution, and the change must not impact employee interests. If the scheme involves a secondary acquisition or the gifting of shares, implementation through a trust becomes mandatory.

Key implementation requirements:

• A single trust may implement multiple schemes, but it must maintain separate books and records for each to ensure transparency.
• The company must ensure that the trust deed complies with Part A of Schedule I of SEBI (SBEB & SE) Regulations, 2021. The company must also file the trust deed with all the stock exchanges where its shares are listed.
• Trustees cannot be:
  
  • Directors, KMPs, promoters, or their relatives.
  • Individuals holding 10% or more of the company's paid-up capital or voting rights.
  • If the company appoints individual trustees or trustees from a ‘One Person Company’, it must appoint at least two trustees. However, a single corporate entity can act as the sole trustee.
• Trustees cannot vote on shares held by the trust to avoid misuse of voting rights.
• The company must obtain shareholder approval before the trust can implement schemes or conduct any acquisition on its behalf.
• Trusts must not trade in derivatives and can only undertake delivery-based share transactions.
• Companies may lend funds to the trust (on appropriate terms) to acquire shares for the scheme implementation.
• Shares held by the trust must be disclosed as “non-promoter and non-public” in stock exchange filings.
• Trusts must make disclosures and follow compliance norms applicable to promoters or insiders under SEBI’s Insider Trading Regulations, 2015.

b. Eligibility

An employee becomes eligible to participate in a company’s LTIP based on the criteria set by its compensation committee. If the employee is a director nominated by an institution as its representative on the company’s Board, the following conditions apply:

• The agreement between the nominating institution and the nominated director must clearly state:
  
  • Whether the director may accept grants under the company’s LTIPs.
  • That any such grant, if accepted, cannot be renounced in favour of the nominating institution.
  • The terms under which the director may receive fees, commissions, or other incentives from the company.
• The nominating institution must submit a copy of this agreement to the company. The company, in turn, must file it with all recognised stock exchanges where its shares are listed.
• The nominated director must place a copy of the agreement before the Board at the first meeting they attend after their appointment.

c. Compensation committee

Listed companies must set up a compensation committee to oversee and administer LTIPs.

Key requirements:

• If the scheme is implemented through a trust, the compensation committee must delegate the scheme’s administration to the trust.
• The committee must define the detailed terms and conditions of the scheme, covering the requirements laid out in Part B,Schedule I of the SEBI (SBEB & SE) Regulations, 2021.
• A company may choose to designate its Nomination and Remuneration Committee (NRC) to act as the compensation committee for LTIP purposes.
• It must also establish appropriate policies and procedures to prevent violations of:
  
  • SEBI (Prohibition of Insider Trading) Regulations, 2015, and
  • SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003, by the company, its employees, or the trust, as applicable.

d. Shareholder approval

A company must obtain shareholder approval through a special resolution at a general meeting before implementing any LTIP for its employees. 

It is also required for:

• Any scheme involving secondary acquisition, specifying the permissible percentage.
• Secondary acquisition by the trust to maintain the 5% cap after capital expansion (e.g., preferential allotment or QIP).
• Grant of options, SARs, shares, or benefits to employees of the holding or subsidiary company.
• Grant of LTIP benefits to any identified employee exceeding 1% of the company’s issued capital in a financial year.

e. Variation of scheme terms

A company can change the terms of its LTIP granted under a previously approved resolution but not yet exercised through a special resolution, as long as the changes do not adversely impact employees.

No shareholder approval is required if the variation is necessary to comply with a regulatory requirement.

In case of such variations, the following conditions apply:

• The variation must comply with the provisions of Regulation 6, just as the original grant does.
• The notice for the special resolution must clearly disclose:
  
  • Full details of the variation
  • The rationale for the change, and
  • Names of employees who will benefit from it.
• The company may reprice unexercised (vested or unvested) options, SARs, or shares if the market price falls and renders the scheme unattractive, but only if:
  
  • It obtains shareholder approval via a special resolution, and
  • The repricing is not prejudicial to employee interests.

f. Winding up of the schemes

When a company winds up a LTIP, any excess shares or funds remaining with the trust after meeting all existing requirements must be dealt with in one of the following ways:

• Used to repay any outstanding loan,
• Distributed to employees, or
• Transferred to another SEBI-compliant scheme, if approved by shareholders, based on the compensation committee’s recommendation.

g. Non-transferability

Options, SARs, or other benefits granted under the scheme:

• Cannot be transferred, pledged, hypothecated, or mortgaged, and only the recipient employee is entitled to exercise the benefit.
• Funding arrangements for the exercise price and tax liabilities may be permitted via company/trustee/empanelled brokers, with proceeds adjusted upon share sale (only for ESOS or SAR, and subject to law).
• In case of death, all unvested benefits vest immediately to legal heirs/nominees.
• In case of permanent incapacity, all outstanding benefits vest on the date of incapacitation.
• On resignation or termination, all unvested benefits lapse. However, vested benefits remain exercisable as per the scheme rules.
• Retirement or superannuation does not impact vesting; benefits continue as per the schedule.
• If the employee is transferred or deputed to an associate company, vesting/exercise rights continue per the original terms.
• In cases of merger, demerger, or restructuring, option treatment must be defined in the scheme and must not harm employee interests.

h. Compliances and conditions for pre-IPO schemes

Companies cannot grant new shares/options under pre-IPO schemes unless:

• The scheme complies with SEBI regulations.
• Shareholders ratify the scheme after the IPO but before any fresh grant.
• Companies must obtain shareholder approval by a special resolution for any change to terms, such as repricing, vesting periods, or maturity dates (except for corporate action adjustments).
• Before granting options/SARs, companies must obtain in-principle approval from the stock exchange.
• If a holding company grants options/SARs to a subsidiary’s employees, it must disclose the cost in the subsidiary's financial statement notes.
• If the subsidiary reimburses the cost, both companies must disclose the transaction in their financial statements.
• Companies must appoint a merchant banker up to the stage of obtaining in-principle exchange approval.

i. Auditor’s certificate

At every AGM, the company’s Board must present a certificate from the secretarial auditor confirming that the scheme is implemented in line with SEBI regulations and the shareholders’ resolution.

j. Accounting policies

Companies must follow applicable accounting standards under Section 133 of the Companies Act, 2013, including any Guidance Note on accounting for employee share-based payments.

Administration of specific schemes

The SEBI (Share-Based Employee Benefits and Sweat Equity) Regulations, 2021, have different administrative and compliance requirements for each equity-based scheme.

This section explains those in detail:

Employee Stock Option Scheme (ESOS)

SEBI mandates that every ESOS must clearly specify how it will be implemented and operated. Companies must make all disclosures outlined in Part G of Schedule I to prospective employees before granting options under the scheme.

• Pricing: The company sets the exercise price, provided it follows the accounting norms under Regulation 15.
• Vesting Period: A minimum vesting period of one year is required. If options replace those from a merged, demerged, or amalgamated company, it can count the earlier holding period toward this requirement. In case of death or permanent incapacity, the options vest immediately. The company may also impose a lock-in on shares after exercise.
• Rights of option holder: Until the employee exercises the option and is allotted shares, they are not entitled to receive dividends, vote, or enjoy any other shareholder rights.
• Failure to exercise: Unexercised options lapse when the exercise window closes; any amount the employee already paid (at grant/vesting/exercise) may be forfeited as allowed by Reg 20.

Stock Appreciation Rights Scheme (SAR SCHEME)

Similar to ESOS and ESPS, companies must define how the SAR scheme will be implemented and operated. They may choose to settle SARs in cash or equity. In equity-settled SARs, any fractional shares must be paid in cash. SARs cannot be offered unless the company makes all the required disclosures.

• Vesting: The minimum vesting period is one year. If SARs are granted in exchange for those held under a scheme in a merged or amalgamated company, the earlier holding period counts toward the one-year requirement. In cases of death or permanent incapacity, SARs vest immediately, and the one-year period does not apply.
• Rights of the SAR Holder: SAR holders do not have voting rights, dividend rights, or any shareholder privileges until actual shares are allotted.

Sweat equity shares

Listed companies can issue sweat equity shares in accordance with SEBI regulations and Section 54 of the Companies Act, 2013. For unlisted companies, SEBI regulations do not apply; they can still issue sweat equity under Section 54 and the Companies (Share Capital and Debentures) Rules, 2014. SEBI’s ICDR Regulations, 2018, become relevant only when an unlisted company is undertaking an IPO, primarily for disclosure and lock-in requirements.

Key points to consider:

• Eligible employees: Companies can issue sweat equity shares to employees or directors (whole-time or otherwise), whether based in India or abroad.
• Shareholder approval: Issuing sweat equity shares requires a special resolution. If shares are issued to promoter-group employees, a simple majority must pass the resolution, and promoters cannot vote. Each issue requires a separate resolution, valid for 12 months from the date of passing.
• Pricing and valuation: The pricing must follow SEBI’s ICDR norms for preferential issues. A merchant banker must carry out the valuation of the know-how or IP contributed. The banker should get a certificate from an independent chartered accountant confirming compliance with accounting standards.
• Accounting treatment: If sweat equity is issued for non-cash consideration:
  
  • If the consideration is an asset, the company must record it on the balance sheet.
  • Otherwise, it must expense it as per the relevant accounting standards.

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FAQ

1. How does a LTIP work?

A Long-Term Incentive Plan (LTIP) rewards employees with additional compensation beyond their base salary based on continued employment, specific performance goals, or a combination of both. Companies typically defer these payments and distribute them over a period of 3 to 5 years to encourage sustained performance.

2. What is an example of a LTIP?

Examples of Long-Term Incentive Plans (LTIPs) include Employee Stock Option Schemes (ESOS), Stock Appreciation Rights (SARs), Restricted Stock Units (RSUs), Phantom Stock, or other equity or cash-based payouts tied to long-term individual or company goals.

3. What are the benefits of LTIPs?

LTIPs help retain talent, promote long-term performance, and align employee interests with company goals. They encourage loyalty by rewarding sustained contribution and reducing turnover. LTIPs also improve a company’s appeal to professionals by strengthening its overall compensation package, while creating a performance-driven culture that supports growth and stability.

4. What is 3-year vesting for LTIP?

In an LTIP, vesting is the process by which an employee earns the right to receive their incentive over time or after meeting certain conditions. A 3-year vesting period means the employee must satisfy the required service duration, performance goals, or both before the award fully vests. Vesting often happens gradually over a defined period following an initial cliff.