The SEBI (Share Based Employee Benefits) Regulations, 2014 (the “Regulations”) regulate various types of schemes offered by companies to their employees relating to shares. In two separate letters issued pursuant to requests for informal guidance, SEBI has stated that the Regulations are not applicable to phantom stock options and similar schemes that do not involve the actual issue or transfer of shares to employees. SEBI issued the informal guidance in response to requests from Mindtree Ltd. and SAREGAMA India Ltd.Mindtree’s request letter to SEBI encapsulates the nature of a phantom stock option scheme where stock appreciation rights (SAR) were issued to certain employees who also happened to be promoters:3. As per the provisions of the Phantom Stock Option Scheme, only notional SAR units were issued at a pre-determined grant price and the Promoters 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. While the cash payouts pursuant to the Phantom Stock Scheme are linked to the share price of the Company’s equity shares, implementation of the Phantom Stock Scheme does not involve any actual purchase or sale of the equity shares of the Company.The issue arose because Regulation 1(3)(iii) of the Regulations provides that the Regulations apply to SAR schemes in addition to other types of employee share benefit schemes. Furthermore, SAR and related matters have been expressly dealt with in the Regulations. At the same time, Regulation 1(4) states as follows:The provisions of these regulations shall apply to any company whose shares are listed on a recognised stock exchange in India, and has a scheme:(i) for direct or indirect benefit of employees; and(ii) involving dealing in or subscribing to or purchasing securities of the company, directly or indirectly; and(iii) satisfying, directly or indirectly, any one of the following conditions: …SEBI’s conclusion as to the inapplicability of the Regulations to phantom stock schemes is based on the highlighted portion above. This indicates the necessity for actual subscription or purchase of shares by employees, which does not occur in the case of phantom schemes.SEBI’s conclusion is understandable and is likely to provide greater flexibility to companies to design their employee share schemes as phantom schemes if they would like to stay outside the purview of the Regulations. However, less clear is the apparent conflict between Regulations 1(3), which expressly makes the Regulations to SAR and Regulation 1(4), which requires subscription or purchase of shares by the employees (which would never occur in a SAR). Moreover, it is not obvious as to why there is a fairly extensive treatment on SAR in the Regulations if they are not designed to cover these and similar phantom schemes in the first place.Finally, due to the SEBI’s conclusion that the Regulations do not apply to SARs, another interesting question raised by Mindtree was found not to be relevant, which SEBI therefore left unanswered. That question relates to the interpretation of Regulation 2(1)(f), which reads as follows:f. “employee” means, — (i) a permanent employee of the company who has been working in India or outside India; or (ii) a director of the company, whether a whole time director or not but excluding an independent director; or (iii) an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company or of an associate company but does not include— (a) an employee who is a promoter or a person belonging to the promoter group; or (b) a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company; Specifically, the question is whether the exclusion of promoters and directors (holding substantial shares) applies only to sub-section (iii) above, i.e. employees of subsidiary, holding company or associate company or whether the exclusion applies to all categories of employees, including those contained in sub-sections (i) and (ii). This ambiguity may have to continue until it is clarified on a future occasion.