Stock Appreciation Rights: How SARs Pay Employees Without Issuing Options

Open the employee benefits note in a listed company’s annual report and, next to the familiar ESOPs, you’ll sometimes find a line about stock appreciation rights. Most shareholders skim past it. They shouldn’t. A SAR pays an employee the rise in the company’s share price without asking them to buy a single share, and the way it’s settled decides how many new shares land on your plate as an existing investor. Here’s how SARs work in India, what SEBI’s rules actually say, and a worked example you can redo with any company’s numbers.

What stock appreciation rights are, in SEBI’s words

The rulebook here is the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, in the version amended up to December 4, 2025. Regulation 1(3) lists stock appreciation rights schemes alongside ESOPs, employee stock purchase schemes, general employee benefit schemes, retirement benefit schemes and sweat equity. So a SAR isn’t a loose HR perk. It’s a regulated scheme for listed companies.

Regulation 2 defines a SAR as a right that entitles the employee “to receive appreciation for a specified number of shares of the company”, with that appreciation paid either in cash or in shares of the company. Three other definitions in the same regulation do most of the work:

• SAR price is the base price fixed on the grant date, used to compute the appreciation.
• Appreciation is the difference between the market price of the share on the date of exercise (or vesting, depending on the scheme) and the SAR price.
• Market price is the latest available closing price on a recognised stock exchange on the day immediately before the relevant date. If the stock trades on both NSE and BSE, the exchange with the higher trading volume sets it.

Put simply, the employee is promised the gap between a fixed starting price and a later market price. If the stock goes nowhere, the SAR is worth nothing. If it climbs, the employee pockets the climb.

SARs versus ESOPs: same gain, very different cash flow

With an ESOP, the employee gets an option to buy shares at an exercise price. To capture the gain, they have to pay that exercise price, which can be a large cheque. A SAR skips that step. The company simply hands over the value of the rise.

SEBI’s definition of exercise price covers both options and SARs and says it is the price, “if any”, payable on exercise. So a SAR scheme can carry an exercise price, but the defining feature is that the employee is paid the appreciation rather than buying the full share at the grant price. Always check the scheme’s own terms.

There’s one more difference that matters to us as shareholders: the number of new shares issued. We’ll see that in the example below.

An ESOP asks the employee to pay up and buy the share. A SAR just pays them the rise, and that’s why it usually creates far fewer new shares.

Cash-settled or equity-settled SARs

Regulation 23(2) leaves the choice to the company: it can run a cash-settled or an equity-settled SAR scheme. If an equity-settled payout works out to a fraction of a share, the fraction has to be paid in cash.

There’s a wrinkle in the definition, though. Explanation 2 to the SAR definition says that, for these regulations, a reference to a SAR means equity-settled SARs, and it excludes any scheme that doesn’t, directly or indirectly, involve dealing in, subscribing to or purchasing the company’s securities. In practice, a cash bonus that simply tracks the share price with no shares involved sits awkwardly outside the SEBI framework, while a scheme that delivers shares, or runs through a trust that deals in them, is squarely inside it. If you’re reading a specific company’s scheme, the annual report should tell you which kind it is.

The rules a SAR scheme has to follow

We went through the regulation clause by clause. These are the ones a shareholder or an employee should know:

• Shareholder approval. Under Regulation 6(1), no scheme can be offered to employees unless shareholders approve it by special resolution in a general meeting. That’s the vote you’ll see in an AGM or postal ballot notice.
• Minimum vesting of one year. Regulation 24 sets a minimum vesting period of one year for SARs. Two exceptions apply. If the SARs replace ones the employee held in a company that merged into this one, the time already served counts towards the year. And on death or permanent incapacity, the one-year minimum doesn’t apply, and the SARs vest on that date.
• No shareholder rights. Regulation 25 says a SAR holder can’t receive dividends, vote, or enjoy any other shareholder benefit on the SARs. Until settlement, it’s a promise, not a share.
• A disclosure document first. Regulation 23(3) says no SAR can be offered unless the company gives prospective grantees the disclosures in Part G of Schedule I.

That Part G document opens with a plain risk statement, and it’s worth reading even if you’ll never hold a SAR. It flags concentration risk (your salary and your benefit both depend on one company), leverage (a change in the share price can cause a much larger change in the value of the SAR), illiquidity (SARs can’t be transferred, so you can’t sell part of them early), and vesting risk (unvested SARs lapse if employment ends, and even vested ones can be forfeited for gross misconduct).

A worked example: XYZ Ltd’s SAR grant

Let’s use a made-up company so the maths is clean. XYZ Ltd grants an employee 1,200 SARs with a SAR price of ₹400. The scheme vests 300 SARs a year over four years, so the first lot vests only after a full year, which meets the one-year minimum.

Two years later, 600 SARs have vested and the employee decides to exercise them. The closing price on the day before exercise, which is the market price under SEBI’s definition, is ₹560.

So under an equity-settled scheme, the employee walks away with 171 shares and ₹240 in cash. Under a cash-settled scheme, they’d get ₹96,000 and no shares at all.

Now compare that with an ESOP

Suppose XYZ had instead granted 600 ESOPs at an exercise price of ₹400. To exercise, the employee pays ₹2,40,000 (600 × ₹400) and receives 600 shares worth ₹3,36,000 (600 × ₹560). The paper gain is the same ₹96,000.

But look at the share count. The ESOP route issues 600 new shares. The equity-settled SAR route issues 171. That’s 429 fewer shares diluting everyone else for exactly the same reward to the employee. This is the main reason we pay attention to SARs when we read an annual report: they’re a more dilution-friendly way to reward staff, though the company gives up the exercise money an ESOP would have brought in.

Same ₹96,000 gain for the employee. 600 new shares under the ESOP, 171 under the SAR. That gap is what an existing shareholder should care about.

What happens when the price moves

Leverage, the risk SEBI flags in Part G, is easy to see with the same numbers. If XYZ’s market price had been ₹616 instead of ₹560, about 10% higher, the appreciation per SAR would be ₹216 instead of ₹160. That’s a 35% jump in the payout for a 10% move in the stock.

It cuts the other way too. If the price on exercise were ₹380, below the ₹400 SAR price, there’s no appreciation to pay. The SAR is simply worth nothing at that point, and the employee would wait, hoping the price recovers before the exercise period runs out.

How to read a company’s SAR disclosures

Part F of Schedule I lists what the board has to disclose about each SAR scheme that existed during the year. When you open the annual report, look for these items:

1. The date of shareholders’ approval and the total number of shares approved under the scheme. This is your maximum possible dilution.
2. Vesting requirements and the maximum term of the SARs granted.
3. The SAR price or pricing formula. A SAR price far below the current market price means a lot of value has already been handed over.
4. The method of settlement (cash or equity) and who chooses it: the company, the employee or a mix.
5. The source of shares: fresh issue (primary), bought from the market by a trust (secondary), or both. Primary issuance dilutes; secondary acquisition uses company money instead.
6. Whether the company accounts for SARs at intrinsic value or fair value. If it uses intrinsic value, it has to disclose the difference from fair-value accounting and the impact on profit and EPS.
7. The movement of SARs during the year: granted, vested, exercised and lapsed.

That accounting point is easy to miss. The SAR cost is an employee expense, and it flows through the profit and loss account. If you’re tracking a company’s margins quarter by quarter, as we do in our guide on how to analyse quarterly results of a company, a big jump in employee costs is sometimes just share-based pay being recognised.

Where SARs fit with other employee schemes

SARs sit in a family of tools that all cost shareholders something, either in cash or in new shares. If you want the dilution maths for options, our piece on ESOP dilution walks through it. For schemes where employees buy shares outright, see the employee stock purchase scheme explainer, and for shares issued for know-how or services, there’s our guide to sweat equity shares.

Our view: a company that leans on equity-settled SARs instead of plain ESOPs is usually being a bit kinder to its existing shareholders on share count. It’s still a cost, and it still shows up in the P&L. The disclosures tell you how big that cost is, and that’s the number worth checking before you decide how you feel about a new grant.

Disclaimer: This article is for information and education only and is not investment advice. XYZ Ltd and all figures in the worked example are hypothetical. Employee benefit schemes and their tax treatment depend on each company’s scheme terms and your own situation. Read the scheme documents and consult a SEBI-registered adviser or tax professional before making any decision.