Context:
Under current Companies (Share Capital and Debentures) Rules, 2014, ESOPs (Employee Stock Ownership Plans) are only issued to employees and prohibited for promoters. Many startup founders, initially employees, later become classified as promoters as their shareholding increases or after company reclassification. This ambiguity has led to confusion about whether they can retain or exercise ESOPs granted before they became promoters.
SEBI’s Proposal and Consultation Paper
- SEBI is considering allowing startup founders, identified as promoters or part of the promoter group, to hold or exercise ESOP benefits granted one year before the IPO.
- The move aims to align incentives, especially for founders with diluted stakes who continue contributing to company growth.
- SEBI emphasized that a cooling-off period between ESOP grant and IPO would be required to prevent misuse.
Rationale Behind the Move
- Founders of new-age technology firms often receive ESOPs or equity-linked instruments instead of large cash compensation to align their interests with long-term company success.
- Removing this ambiguity will give policy certainty and support startup founders in maintaining ESOP benefits even if they become promoters.
- Vishal Yaduvanshi, partner at Cyril Amarchand Mangaldas, stated that this aligns founders’ interests with company performance.
Additional Regulatory Clarifications Proposed
- The consultation paper also seeks to clarify minimum holding periods for equity shares eligible for offer-for-sale in public issues.
- SEBI noted that regulations do not currently prohibit conversion of options after an individual ceases to be an employee.
Key Highlights of SEBI’s Proposed ESOP Relaxation
| Aspect | Current Regulation | Proposed Change |
|---|---|---|
| ESOP eligibility for promoters | Prohibited for promoters or promoter groups | Allow founders to hold/exercise ESOPs granted 1 year prior to IPO |
| Ambiguity for founders | Founders reclassified as promoters lose clarity on ESOPs | Proposed change aims to provide clarity and policy certainty |
| Cooling-off period | Not specified | Cooling-off period between ESOP grant and IPO to prevent misuse |
Impact on Startup IPOs
- This move will benefit startup founders, ensuring retention of ESOP incentives and aligning interests with investors and shareholders.
- It reflects SEBI’s responsiveness to the unique capital structures and incentive mechanisms of new-age companies.
- Clear regulatory guidance will support smoother IPO preparations for startups.
