STOCK APPRECIATION RIGHTS (SAR)

By Mehjabeen Haider

Companies Act, 2013 does not explicitly mention SAR scheme and neither does it prohibit issue of SAR to employees. 

Section 62(1)(b) of CA 2013 deals with issue of shares to employees under a scheme of employee stock options subject to special resolution by the company & such conditions as may be prescribed.

(Employee stock options as per sec 2(37) of the CA 2013 means the option given to directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers, employees, the benefit or right to purchase or to subscribe for the shares of the company at a future date at a predetermined price.)

Since an option/right is granted to the SAR grantee to receive the benefit of appreciation in the price of company share in the form of cash settled SAR or equity settled SAR. Such benefit or right mentioned in the ESOP definition can be interpreted to include benefit under SAR scheme as well. This is a refuge available for unlisted companies issuing stock appreciation rights to employees.

1. A stock appreciation right (“SAR“) is the right to receive the benefit of increase or appreciation in the value of a company’s stock.

• It is defined under the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 (the “SEBI (SBEB) Regulations“) 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.”

• SAR is normally paid in cash, although it could also be settled in equivalent value of stock. Alternatively, a SAR could also be settled in a combination of cash and stock.

• Along with employees these can be extended to third parties including advisors and consultants of the company.

• While they may offer the benefit of appreciation in the company’s equity, they do not represent actual equity. Another benefit of SAR is unlike ESOP an employee does not have to pay for the exercise price and purchase the shares.

• Though, SARs operate and pass through the same life cycle as ESOP (stock options), of (i) grant, (ii) earning or vesting, and (iii) retirement of SARs and their settlement.

A SAR grantee does not have to pay the exercise price but receives the sum of the increase in the stock price as either stock or cash or a combination of both. Although SARs plans also often have vesting schedules, SAR grantee can exercise their rights whenever they choose after the schedule is complete.

• A Phantom Stock Plan /program allows the employee to receive stock dividends when issued by the company and thus mirror actual ownership more closely. Participants do not receive voting rights.

• SARs are taxed in essentially the same manner as non-qualified stock option plans. There is no tax assessed when they are granted, nor during the vesting process. However, any appreciation in the stock price between the grant and exercise dates is taxed as ordinary income.

Distinctive Advantages of SAR

From the company’s perspective	From an employee’s perspective
settlement of SARs in cash, reduces and even eliminates dilution of the shareholders’ stake in the company; and   financial disclosures of company information given/ available to shareholders need not be given to SAR holders, and this holds true even on the retirement of SARs.	– there is no need to pay an exercise price. – Comparatively ESOPs may have no value in the absence of a buyer for the stock options, but in the case of ‘Cash Settled SARs’, value is offered by the company itself. – Cash Settled SARs are viewed as cash bonus plans for employees by the issuing company. The employees (in cases where the settlement is by cash) never hold the shares of the company.

We will be as a follow up to this Blog share procedures for issuing SARs by unlisted and listed companies.