Founders of startups planning to go public no longer need to part ways with their employee stock options (ESOPs) before listing, thanks to a regulatory tweak by Sebi.
In a decision announced on June 19, the markets regulator approved a proposal allowing promoters to hold or exercise ESOPs even after their company goes public—provided they were granted those stock options at least one year before filing the Draft Red Herring Prospectus (DRHP).
This marks a shift from the older rule that forced promoters to give up share-based benefits before listing, a move that had long been criticised by startup founders.
Until now, once a company filed for an IPO, anyone classified as a promoter had to let go of any ESOPs or similar share-based benefits. Founders, often categorised as promoters, were barred from holding or being granted such benefits at the time of DRHP filing. If they held ESOPs, they had to liquidate them before the IPO. That didn’t sit well with many in the startup world.
After all, founders typically take home modest salaries in the early days and rely on ESOPs as both a reward and an incentive. As the company grows and more investors come on board, their equity gets diluted. Being forced to sell off ESOPs before the IPO meant losing out on the future potential of a business they helped build.
The latest change attempts to strike a better balance. If a founder received ESOPs at least a year before filing the DRHP, they can now retain and exercise those options even after the company goes public. This, Sebi says, is aimed at addressing the concerns of startup founders and aligning rules with current market realities.
Interestingly, Sebi also points out that the move could help startups that are looking to do a "reverse flip"—in other words, shift their legal base from abroad to India before going public. Several Indian startups incorporated in Singapore or the US are said to be considering this, especially in the context of regulatory advantages and market sentiment.
It’s worth noting that this isn’t a blanket exemption. The benefit applies only if the ESOPs were granted at least a year before the DRHP filing. It doesn’t allow promoters to keep receiving fresh ESOPs post-listing. But it does mean that founders won’t be penalised for having taken stock options early in their journey.
While Sebi hasn’t outright said it, this change may also be a signal that the regulator is looking to make Indian markets more founder-friendly—especially as more home-grown startups move towards public listings.
