SEBI has put forth a proposal to allow 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 at least a year before the initial public offering (IPO).
This proposed change will be a sigh of relief for founders of companies planning to go public, especially in the technology sector, as current rules do not allow promoters and members of the promoter group to receive ESOPs. SEBI has been adamant that founders of companies going for an IPO with a stake of 10% or more be classified as promoters, further complicating the situation.
Vishal Yaduvanshi, Partner at Cyril Amarchand Mangaldas, emphasized the importance of ESOPs in aligning the interests of founders with the company’s performance. Allowing founders to continue holding ESOPs after being reclassified as promoters ensures policy outcome certainty.
The existing SEBI rules create uncertainty for tech-driven businesses where founders receive ESOPs instead of high salaries. Once classified as promoters at the draft red herring prospectus (DRHP) stage, they risk losing their ESOP benefits, which can disrupt leadership retention and motivation, as stated by Binoy Parikh, Executive Director at Katalyst Advisors.
The shareholding of founders in many new-age tech companies gets diluted with each fundraising round, making ESOPs a critical tool to incentivize them. Preventing founder-promoters from holding ESOPs reduces their commitment to the company and could lead them to explore other business opportunities or exit the company altogether.
Harish Kumar, Partner at Luthra and Luthra Law Offices India, highlighted the recognition given by the recent amendments to SARs, which are non-dilutive and may be preferred by new-age companies as they incentivize eligible personnel without disrupting the capital table.
In terms of the offer for sale (OFS) lock-in period, SEBI has proposed that even compulsorily convertible securities converted into equity shares and offered for sale should be considered for the one-year lock-in. This move aims to demonstrate long-term commitment by shareholders before offering shares for sale, based on the period of existence of invested capital.
Overall, the proposed changes by SEBI provide much-needed clarity and certainty for founders of listed entities, especially in the tech sector, regarding ESOPs and SARs. These reforms support long-term value creation without allowing for regulatory arbitrage and ensure alignment between founders, investors, and the company’s performance.
