Description

SEBI amends ESOP regulations to mandate independent registered valuers instead of merchant bankers for valuation of shares under employee benefit schemes.

Summary

SEBI has notified the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) (Second Amendment) Regulations, 2025, effective from the thirtieth day of publication in the Official Gazette (January 2, 2026). The key amendment mandates that valuation of shares under employee benefit schemes must be conducted by an independent registered valuer as defined under Section 247 of the Companies Act, 2013, replacing the previous requirement of merchant banker valuations.

Key Points

  • Valuation of shares for ESOP/sweat equity schemes must now be done by independent registered valuers instead of merchant bankers
  • Definition of “valuer” aligned with Section 247 of Companies Act, 2013
  • Regulations come into force 30 days after Official Gazette publication (effective January 2, 2026)
  • Transitional provision allows merchant bankers to complete ongoing valuation assignments within 9 months of regulations coming into force
  • Amendment modifies Regulation 2(1)(bb) and Regulation 34 of the principal regulations

Regulatory Changes

Amendment to Regulation 2 (Definitions)

  • Clause (bb) defining “valuer” has been replaced to align with the definition in Section 247 of the Companies Act, 2013
  • Valuer means a registered valuer as per the Companies Act framework

Amendment to Regulation 34 (Valuation)

  • Sub-regulation (1) amended: Valuation shall be done by an independent registered valuer (previously merchant banker)
  • Proviso added: Merchant bankers who have commenced but not completed valuation work before these amendments take effect must complete such work within 9 months from the date of implementation
  • Existing sub-regulations (2) and (3) of Regulation 34 have been deleted

Compliance Requirements

For Companies with ESOP/Sweat Equity Schemes:

  • Engage independent registered valuers (as defined under Companies Act, 2013) for share valuations under employee benefit schemes
  • Ensure valuers are registered under the Companies (Registered Valuers and Valuation) Rules, 2017
  • Transition ongoing merchant banker valuations within the permitted timeframe

For Merchant Bankers:

  • Complete any valuation assignments undertaken before the amendment comes into force within 9 months of January 2, 2026 (i.e., by October 2, 2026)
  • No new valuation assignments for ESOP/sweat equity schemes to be undertaken after regulations come into force

For Registered Valuers:

  • May now undertake valuation assignments for share-based employee benefit schemes and sweat equity
  • Must comply with valuation standards and Companies Act requirements

Important Dates

  • December 3, 2025: Notification date (published in Official Gazette)
  • January 2, 2026: Effective date (30 days from publication)
  • October 2, 2026: Deadline for merchant bankers to complete ongoing valuation assignments (9 months from effective date)

Impact Assessment

Market Impact:

  • Shift in valuation work from merchant bankers to registered valuers for ESOP schemes
  • Creates new business opportunity for registered valuers qualified under Companies Act
  • May impact merchant bankers currently providing valuation services for employee benefit schemes

Operational Impact:

  • Companies with active or planned ESOP/sweat equity schemes must identify and engage registered valuers
  • Potential transition challenges for companies with ongoing valuation processes
  • May affect timelines for ESOP scheme implementations during transition period

Compliance Impact:

  • Strengthens alignment between SEBI and Companies Act valuation requirements
  • Ensures valuations are conducted by professionals specifically registered for valuation services
  • Reduces regulatory overlap by removing merchant banker role in valuations

Sector-Specific Impact:

  • Affects all listed and unlisted companies implementing share-based employee benefit schemes
  • Particularly relevant for startups and growth companies that frequently use ESOPs as compensation tools
  • Professional services sector (valuers, merchant bankers) will see redistribution of valuation assignments

Impact Justification

Procedural change affecting companies with ESOP schemes - shifts valuation responsibility from merchant bankers to registered valuers, with transition period provided