[The Viewpoint] Stock Appreciation Rights: An Unregulated Alternative to ESOPs

While unlisted entities still await regulatory clarification when it comes to issuance of SARs, nothing under Indian law bars or restricts unlisted entities from adopting a SARs scheme and issuing SARs.
 Jagrat Rawal and Shivani
Jagrat Rawal and Shivani

Employees are crucial for the growth of any organization. However, the prevailing competition in the current market and the long-term consequences of the COVID-19 pandemic has resulted in a high-level attrition of employees across every sector.

To ensure retention and to incentivise employees, employers continue to formulate methods to retain talent. Typically, these are:

(i) granting of employee stock options (ESOPs);

(ii) issuance of sweat equity shares (SES); and

(iii) granting of Stock Appreciation Rights (SARs).

While ESOPs and SES can only be granted to “permanent employees” of a company as per the Companies Act, 2013 (Act), part-time employees/ consultants remain crucial for an organization. Therefore, companies are looking to incentivize such part-timers and SARs serve as one such alternative. It is to be noted that while the private companies in India are implementing SAR schemes to explore the said alternative, the absence of laws governing SARs for private companies leaves room for regulatory arbitrage.

MCA to Address Changes in Future?

Under regulation 2 (1)(qq) of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“SEBI Benefits Regulations”), SARs have been defined as “a right given to a SAR grantee entitling him to receive appreciation for a specified number of shares of the company where the settlement of such appreciation may be made by way of cash payment or shares of the company”.

The SEBI Benefits Regulations, applicable to listed entities, provide that no scheme, including SARs, should be offered to employees without the shareholders passing a special resolution.

The grant/issuance of SARs by unlisted companies remains unregulated and unrecognized under the SEBI Benefits Regulations or the Act. This gap has been recognised by the Ministry of Corporate Affairs (MCA) under the Report of the Company Law Committee published in March 2022 (CLC Report). The CLC Report recommended that:

The Committee was of the opinion that RSUs and SARs should be recognised under CA-13 through enabling provisions. If these schemes require the issue of further securities by the company, their issuance must be allowed only after approval of the shareholders through a special resolution.

However, where the settlement of such rights do not involve offer or conversion into securities, approval by shareholders need not be mandated.

It is interesting that the recommendation by the CLC Report is limited to the regulation of equity linked/settled SARs rather than SARs that are settled by way of cash. This is similar to the provisions set out in the SEBI Benefits Regulations.

Additionally, the CLC Report has also proposed an amendment to section 62 (1) of the Act to allow additional employee compensation schemes linked to the value of the company’s share capital. However, it remains to be seen whether any restrictions will be attached to the grant/ issuance/ exercise of SARs.

Foreign Exchange Regulations

Prior to the recent amendment of the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (“NDI Rules”) on April 12, 2022, the NDI Rules only recognized ESOPs and SES. However, through the amendment dated April 12, 2022 (“NDI Amendment”), the inclusion of the broad definition of “Share Based Employee Benefits” paves way for SAR as an incentive scheme as well. Having said that, it is noteworthy that under the said definition of “Share Based Employee Benefits”, issuance of equity instruments by Indian companies pursuant to share based employee benefits includes issuance to only:

(i) employees;

(ii) directors; or

(iii) employees or directors of the holding company or JVs or wholly owned overseas subsidiary(ies), resident outside India.

Hence, from the reading of the definition of “Share Based Employee Benefits” it becomes clear that equity settled SARs are now covered under the NDI Rules and therefore, any SAR schemes and any issuance of SARs should be in compliance with the NDI Rules. However, be that as it may, the NDI Amendment does not recognize and is silent on the issuance of equity instruments and share based employee benefits for foreign consultants/ part employees and hence, the restriction still remains for the Indian companies to issue any share-based benefits, including SARs, to foreign part time employees/ consultants.

Compliance Conundrum

The recognition of SARs under the NDI Rules and the absence of recognition of SARs under the Act presents a compliance conundrum for unlisted companies in India. Given that the Act does not recognize SARs and is silent on the issuance of SARs, a regulatory grey area exists around issuance of SARs/ adoption of SARs.

As a matter of abundant caution, considering the compliances which are required under the NDI Rules, it is advisable that unlisted companies should follow the procedure as established for ESOPs under the Act while adopting a SARs scheme or for the issuance of SARs.

This still causes uncertainty on aspects such as whether unlisted companies should also wait for the 1-year cliff period with respect to SARs (as applicable to ESOPs). We believe that in the absence of clear guidelines around vesting of SARs, the 1-year cliff period should not be applicable to SARs and therefore, in absence of any regulation. the vesting schedule can vary from person to person, however, private companies, erring on the side of caution, may choose to follow the regulations and guidelines applicable currently for ESOPs.


While unlisted entities still await regulatory clarification when it comes to issuance of SARs, nothing under Indian law bars or restricts unlisted entities from adopting a SARs scheme and issuing SARs. Having said that, it is prudent that from a good corporate governance perspective, unlisted entities comply with the NDI Rules and formulate SARs scheme keeping in mind the CLC Report.

Jagrat Rawal is a Senior Associate and Shivani Pathak is an Associate at Chandhiok & Mahajan.

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