KEY TAKEAWAYS FROM SEBI BOARD MEETING HELD ON JUNE 18, 2025: RELIEF FOR STARTUP FOUNDERS ON ESOP RETENTION DURING IPOS

A. Introduction: Clarifying ESOPs for Startup Founders in India’s IPO Landscape

Employee Stock Option Plans (ESOPs) are a cornerstone for talent attraction and incentivisation in Indian startups, especially for early founders who often receive equity in lieu of high salaries. However, a significant challenge arose when these founders, critical to the company’s growth, were reclassified as ‘promoters’ during the Initial Public Offering (IPO) process. Historically, the Securities and Exchange Board of India (SEBI) regulations restricted promoters from holding such share-based benefits, often forcing founders to liquidate their ESOPs before listing.

The Securities and Exchange Board of India (SEBI) has provided significant relief to founders of IPO-bound startups by allowing them to retain their Employee Stock Ownership Plans (ESOPs) even if they are classified as promoters at the time of filing their Draft Red Herring Prospectus (DRHP). This crucial amendment addresses a long-standing regulatory challenge faced by startup founders.

On June 18, 2025, SEBI’s board approved a proposal to amend Regulation 9(6) of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.  While the formal gazette notification containing the full legal text is typically issued following such board approvals, the key changes, widely reported by major financial news outlets, are consistent with the information provided in your research overview.

The core of this amendment is to allow an employee, who is later identified as a promoter or a member of a promoter group in the DRHP filing, to continue to hold, exercise, and avail ESOPs, Stock Appreciation Rights (SARs), or similar instruments.  A critical condition for this provision is that such instruments must have been granted at least one year before the company decided to file the DRHP.

B. Why This Amendment Matters:

Previously, founders who transitioned into the promoter category were typically barred from holding share-based benefits, such as ESOPs, and were required to liquidate them before an IPO. These often penalised genuine early contributors had accepted equity as part of their compensation in lieu of higher salaries during the startup’s growth phase. This amendment acknowledges the unique equity structures prevalent in early-stage startups.

By preserving valid, pre-existing grants, SEBI aims to:
1. Honour Genuine Contributions: It ensures that the equity earned by founders for their early efforts and risks is protected.

2. Prevent Misuse: The stipulated 12-month “cool-off” period before DRHP filing serves as a safeguard against opportunistic or last-minute equity manipulations intended to inflate promoter holdings immediately before an IPO.

C. Practical Implications for the Firms:

• Retention of ESOPs: Founders who received ESOPs or SARs more than a year before the board’s decision to approve the DRHP filing can now legitimately retain and exercise these instruments post-listing, even if reclassified as promoters.
• No New Grants for Promoters: It is crucial to note that this regulation does not permit any new grants of share-based benefits to individuals who are already classified as promoters. Only existing, properly timed benefits are preserved.
• Review and Compliance: HR and legal teams should meticulously review existing ESOP policies, vesting schedules, and documentation to ensure strict compliance with the 12-month requirement.
• DRHP Disclosures: Draft offer documents must disclose that instruments held by promoters qualify under this new provision and adhere to the stipulated timeline.
• Governance Updates: ESOP trust deeds, shareholder agreements, board resolutions, and internal manuals should be updated to reflect this amendment.

• Communication: Transparent communication with founders, investors, and key stakeholders is vital to explain how this change reinforces equity retention while maintaining fairness and regulatory integrity.

This move by SEBI is expected to further encourage startups to list domestically by providing clarity and certainty regarding founder equity.

D. Current Status of Official Notification

On June 18, 2025, the Securities and Exchange Board of India (SEBI) held a significant board meeting. The outcomes of this meeting, including the approval of the ESOP amendment, were officially communicated through a press release issued on the same date. This press release marks the formal announcement of the Board’s decision and the discussions that took place.

While the decision has been approved by the Board and widely reported by various financial news channels, it is important to note that the full official Gazette Notification or the detailed Circular containing the precise legal wording of the amendment to Regulation 9(6) of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, has not yet been notified and enacted by SEBI.