SEBI has proposed allowing employees identified as “promoter” or “promoter group” in the draft offer document to be eligible to hold, exercise or avail of any employee stock option plans (ESOPs) or stock appreciation rights (SAR) provided these were granted a year before the initial public offering (IPO).
This will bring relief to founders of IPO-bound companies, particularly new-age technology issuers, as promoters and members of promoter groups are not entitled to receive ESOPs as per current rules. For several months now, the market regulator has been insisting that founders of IPO-bound companies holding a stake of 10 per cent or more classify themselves as promoters, compounding the situation further.
“ESOPs are a great tool to align the interest of founders that hold significantly diluted stakes with the company’s performance. Allowing such founders to continue holding ESOPs post reclassification as a promoter, provides policy outcome certainty,” said Vishal Yaduvanshi, Partner, Cyril Amarchand Mangaldas.
The current SEBI rules especially create uncertainty for tech-driven businesses where founders receive ESOPs in lieu of high salaries. Once classified as promoters at the DRHP stage, they risk losing their ESOP benefits, potentially disrupting leadership retention and motivation, said Binoy Parikh, Executive Director, Katalyst Advisors.
“The proposed clarification provides much-needed certainty by allowing founders to retain and exercise pre-granted ESOPs, ensuring alignment with investors while preventing last-minute restructuring. The cooling-off period adds safeguards against misuse, making this a balanced reform that supports long-term value creation without regulatory arbitrage,” Parikh said.
The shareholding of founders in many new-age tech companies gets diluted with each round of fundraising, which is why they are incentivised through ESOPs. Barring founder-promoters from holding ESOPs lowers skin in the game, and can lead them to build competing businesses or exit the company altogether.
“The recent amendments give substantial regulatory recognition and structure to SARs, which are non-dilutive, and may be preferred by new age companies going forward as such rights don’t disturb the cap table while incentivising eligible personnel,” said Harish Kumar, Partner, Luthra and Luthra Law Offices India.
OFS lock-in
As per current norms, only such fully paid-up equity shares can be offered for sale to the public, which have been held by the sellers for at least one year prior to the filing of the draft offer document. This refers to only equity shares acquired pursuant to an approved scheme. Sebi has now proposed that even compulsorily convertible securities converted into equity shares and offered for sale can be considered for the one-year lock-in.
“The rationale behind the one-year holding period serves the objective of demonstrating long-term commitment by shareholders before shares are offered for sale. Accordingly, eligibility of equity shares to be offered for sale would need to be calculated based on the period of existence of ‘invested capital,” the regulator said on Thursday.
