SEBI ESOP rules have been amended to allow startup founders, who are identified as promoters at the time of an IPO, to continue holding and exercising employee stock options (ESOPs) and other share-based benefits, provided these were granted at least one year before filing draft offer documents.
In its notification, SEBI said: “An employee who is identified as a ‘promoter’ or part of the ‘promoter group’ … and who was granted options, SAR (Stock Appreciation Rights) or any other benefit under any scheme at least one year prior to filing of the draft offer document, shall be eligible to continue to hold and/or exercise such options, SAR or any other benefit.”
What changed?
Until now, promoters were ineligible to hold or be granted ESOPs and similar share-based benefits, and those who held such benefits at the time of filing the draft red herring prospectus (DRHP) had to liquidate them before the IPO, a requirement viewed as discouraging for startups. The amendment removes that barrier for awards granted at least a year before IPO filing.
What is SEBI Notification All About?
The relief directly addresses a pain point for founders who become promoters during the IPO process, allowing continuity of long-term incentives already granted. Sebi’s notification was made public on Tuesday.
Sebi has indicated the amendment will particularly help companies preparing to list in India after “reverse flipping”, i.e., shifting their country of incorporation back to India from overseas jurisdictions.
The change follows board-level approval of the proposal earlier this year, culminating in the formal notification this week.
SEBI ESOP Rules: Key takeaways
- Founders identified as promoters at IPO can keep and exercise ESOPs/SARs granted ≥1 year before filing the draft offer document.
- Prior rules required promoters to liquidate such benefits before the IPO; this is no longer required for eligible pre-IPO grants.
- The move is expected to support reverse-flipping companies seeking domestic listings.
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