SEBI Proposes Key Reforms on ESOPs and Lock-In Norms for IPO-Bound Promoters

SEBI has proposed allowing employees identified as “promoter” or “promoter group” in the draft offer document (DRHP) to hold, exercise, or avail of:

• Employee Stock Option Plans (ESOPs)
• Stock Appreciation Rights (SARs)
• Condition: These ESOPs or SARs must have been granted at least one year before the initial public offering (IPO).

Relief for Founders of New-Age Tech Companies

• Current rules disallow promoters and promoter group members from receiving ESOPs.
• The new proposal is significant for founders with diluted stakes who rely on ESOPs for motivation and retention.
• Founders forced to classify themselves as promoters (holding ≥10% stake) were at risk of losing ESOP benefits under existing norms.

Industry Perspective on ESOP Reform

• Binoy Parikh, Executive Director, Katalyst Advisors:

“This clarification helps founders retain ESOPs, avoiding disruptive last-minute restructuring and ensuring alignment with investors.”

• Founders of tech startups often get ESOPs in lieu of high salaries; blocking them from retaining ESOPs could harm retention and incentivize exits or competing ventures.
• Harish Kumar, Partner, Luthra and Luthra Law Offices India:

“SARs are non-dilutive and may be preferred by new-age companies as they don’t disturb the cap table while still rewarding key personnel.”

Changes in OFS (Offer for Sale) Lock-In Norms

• Current norms allow shares to be offered for sale to the public only if they’ve been held for at least one year prior to DRHP filing.
• SEBI now proposes that equity shares converted from compulsorily convertible securities and offered for sale can also be considered under the one-year lock-in calculation.
• SEBI’s reasoning:

“The one-year holding period demonstrates long-term shareholder commitment. The eligibility should be based on the period of existence of ‘invested capital’.”

SEBI’s proposed changes bring regulatory clarity and flexibility for IPO-bound companies, particularly founder-promoters in tech startups, by allowing continued ESOP and SAR benefits. Additionally, modifications in OFS lock-in norms will help investors demonstrate long-term commitment without unnecessary structural hurdles.

Source: BL