Startup founders heading toward the public markets have just received a long-awaited regulatory win, and the response from India’s tech ecosystem is overwhelmingly positive.
Investors, founders, and policy experts say the Securities and Exchange Board of India's (Sebi) latest move, which allows founders to retain their Employee Stock Ownership Plans (ESOPs) even after being labelled promoters, fixes a long-standing mismatch between India’s listing rules and the operational realities of high-growth startups.
Until now, Indian regulations made no distinction between traditional promoters and startup founders, barring both from holding stock options. This created complications for tech startups, where founders often take on low salaries, endure multiple rounds of dilution, and rely on ESOPs as deferred compensation. Many were forced to rework their cap tables ahead of IPOs just to stay eligible. Sebi’s announcement on June 18 lifts that burden.
Under the new rule, founders can now hold or exercise ESOPs after going public, but only if the stock options were granted at least one year prior to filing the Draft Red Herring Prospectus (DRHP). These grants must also be transparently disclosed in the DRHP. Sebi said the move is part of a broader push to enhance ease of doing business and improve flexibility in public listings.
Siddarth Pai, founding partner at 3one4 Capital, welcomed the change as a “fantastic step in the right direction.” He noted that the previous framework created unnecessary complexity and ambiguity around whether founder ESOPs could be exercised or qualified for inclusion in an offer-for-sale.
“Sebi has now put in a very transparent regime… once you meet the norms and minimum holding period, you can end up exercising (ESOPs),” Pai told Moneycontrol, adding that the regulator seems increasingly attuned to the market’s needs.
Others pointed out that the reform does more than remove ambiguity, it helps founders stay invested in their companies well after the IPO, aligning incentives with long-term value creation.
“This is an excellent move and long awaited as well. Founders sacrifice a lot during the building phase of a startup and as they head toward a listing, there is a lot of pressure in getting the cap table and valuation right so that it’s market friendly,” said Vinod Murali, co-founder and managing partner at Alteria Capital.
“This relaxation allows founders to participate further in value creation beyond the listing timeline where real value gets created in the long run,” he added.
Founders concur, saying the rule strengthens continuity at the leadership level — not just to list the company, but to run it in the long term.
“This is a good move — it allows promoters and founders to be incentivized for the long term,” said Mayank Kumar, co-founder of BorderPlus and upGrad. “Taking a company to an IPO is one phase, but running a listed company is a completely different ball game. This change lets the board continue aligning founders’ interests by granting ESOPs that can be retained post-listing.”
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Policy advocates, too, see the move as a meaningful shift in India’s regulatory posture toward new-age companies.
The Startup Policy Forum praised Sebi’s decision, calling it “a big relief to founders of new-age companies” and a step that “will enable them to avail skin-in-the-game benefits and align their interests with other shareholders.”
It added that the one-year gap between grant and DRHP filing would serve as a safeguard. “The one-year cool-off period…will ensure the provision is not misused,” the Forum said in a statement.
The reform is also expected to boost founder morale and retention post-IPO – a phase where investors expect continued execution and growth.
“SEBI now allowing founders to retain ESOPs after IPO is a positive step towards making the markets more entrepreneur friendly,” said Kushal Bhagia, founder of All In Capital.
“Founders spend 7–12 years building a business that goes for an IPO – with minimum salary and a lot of equity dilution, especially in bear markets. Allowing them to retain ESOPs will ensure that the founder feels incentivized to continue growing the business post IPO, which is in the best interest of investors as well,” he added.
In addition to morale, equity experts say the move brings overdue nuance to how India treats startup founders versus legacy business promoters.
“ESOP for most management is a form of compensation. For start-up founders, unlike traditional promoters, the starting compensation is much lower than industry. So it incentivises them if this is allowed,” said Ravi Ravulaparthi, CEO and co-founder of Qapita, a firm that automates workflow around equity management and ESOP.
He also noted that once shares become liquid after listing, founders can finally benefit from the value they’ve built — a key difference from the illiquid private market. “Startup founders would have diluted themselves substantially during several rounds of equity raise…this differentiation helps the industry as a whole," Ravulaparthi added.
The timing of Sebi’s decision is particularly significant. ESOP activity in India has been picking up, with 26 startups announcing buyback programmes in 2024, up from 19 the year before, according to data from Qapita, as reported by Moneycontrol earlier.
While the total payout value dipped to $252 million — down from 2023’s Flipkart-skewed $825 million — the rising number of buybacks signals growing maturity in India’s private markets.
Meanwhile, the IPO pipeline remains active. Thirteen startups listed in 2024, raising over Rs 29,000 crore, and at least 25 more are expected to test the waters this year, though some plans have been delayed due to softening market conditions.
By making it easier for founders to stay invested – both financially and emotionally – even after a public listing, Sebi’s move could go a long way in making Indian capital markets more founder-friendly. And that, industry insiders agree, is a step worth applauding.
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