SEBI has put forward a proposal that would allow employees designated as “promoter” or “promoter group” in the draft offer document to be eligible for holding, exercising, or benefiting from any employee stock option plans (ESOPs) or stock appreciation rights (SAR) as long as these were granted at least a year before the initial public offering (IPO).
This move comes as a relief to founders of companies preparing for an IPO, particularly those in the technology sector, as current rules prohibit promoters and members of promoter groups from receiving ESOPs. The market regulator has been emphasizing that founders of IPO-bound companies with a stake of 10% or more should classify themselves as promoters, adding to the complexity of the situation.
“ESOPs are a valuable tool for aligning the interests of founders with significantly diluted stakes with the company’s performance. Allowing these founders to retain ESOPs even after being reclassified as promoters ensures policy outcome certainty,” said Vishal Yaduvanshi, Partner at Cyril Amarchand Mangaldas.
The current regulations create uncertainty for tech-driven businesses where founders receive ESOPs instead of high salaries. Once classified as promoters during the DRHP stage, they risk losing their ESOP benefits, which could disrupt leadership retention and motivation, according to Binoy Parikh, Executive Director at Katalyst Advisors.
“The proposed clarification brings much-needed certainty by allowing founders to retain and exercise previously granted ESOPs, ensuring alignment with investors and preventing last-minute restructuring. The cooling-off period adds safeguards against abuse, making this a balanced reform that supports long-term value creation without regulatory loopholes,” Parikh explained.
In many new-age tech companies, founders’ shareholding gets diluted with each fundraising round, so they are incentivized through ESOPs. Preventing founder-promoters from holding ESOPs reduces their commitment, potentially leading them to start competing businesses or exit the company altogether.
“The recent amendments provide significant regulatory recognition and structure to SARs, which are non-dilutive and may be favored by new age companies in the future as they do not impact the cap table while incentivizing eligible personnel,” said Harish Kumar, Partner at Luthra and Luthra Law Offices India.
Regarding the offer for sale (OFS) lock-in period, SEBI has proposed that even compulsorily convertible securities converted into equity shares and offered for sale can be considered for the one-year lock-in period. This aims to demonstrate long-term commitment by shareholders before selling their shares.
“The rationale behind the one-year holding period is to show shareholders’ long-term commitment before offering shares for sale. Therefore, the eligibility of equity shares for sale should be based on the duration of ‘invested capital,'” the regulator stated.
Overall, these proposed changes aim to provide clarity and certainty for founders of companies preparing for an IPO, particularly in the technology sector, while also ensuring alignment with investors and promoting long-term value creation.
