Major relief for founders of IPO-bound startups as Sebi allows ESOP benefits

Key takeaways from SEBI's latest board meeting: PSU delisting, startup ESOP clarity, FPI easing among key moves

In a move that would bring major relief to founders of startups mulling a public listing, Sebi has allowed founders to hold on to ESOPs, subject to certain conditions.

"The proposal approved by the Board shall facilitate founders who received such benefits (ESOPs) at least one year prior to the filing of DRHP with the Board, to continue holding, and/or exercising such benefits even after being specified as the promoters and the company becoming a listed entity," Sebi's statement said on June 18, highlighting that the decisions are part of an overall objective of enhancing the ease of business.

This decision is expected to convince startup founders to come to the public markets, said Sebi chairman Tuhin Kanta Pandey, while addressing the media after the board meeting. He, however, clarified that an industry proposal of allowing fresh ESOP benefits to be availed by founders after the listing was not approved by the board.

Currently, founders have to be classified as promoters before filing for an IPO, but the hindrance is that the rule also prohibit issuance of ESOPs to promoters.

Also read: Sebi grants investors more flexibility to co-invest with Alternative Investment Funds

In a consultation paper released in March 2025, Sebi had proposed changing the rules around employee stock options plans (ESOPs) to help founders benefit, even if they have to be classified as promoters when the company is approaching capital market listing.

The capital market watchdog proposed that a person who ceases to be an employee after having been identified as a promoter be allowed to continue to hold their ESOPs, provided those ESOPs or other benefits were issued one year before the company comes out with an initial public offer (IPO).

Under the Sebi (Share Based Employee Benefits and Sweat Equity) or (SBEB and SE) Regulations, ‘promoters’ and ‘members of promoter group’ are not entitled to receive ESOPs and an employee cannot be a promoter or member of the promoter group.

An amendment to the rule was demanded by a large section of the industry as there may be cases where founders are listed as promoters of an IPO-bound company, based on their holding including the options which were vested, since public issue norms require that. In such a scenario, the existing norms do not clearly state whether the employee with the ESOP (such as the founder) can exercise them.

Incidentally, a similar norm was earlier applicable in the unlisted space as well, though it was amended to bring the rules in sync with the requirement of the current era. The amendment was the need of the hour as start-ups, more often than not, used ESOPs to keep founders and key executives invested in the venture.

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