India’s capital markets watchdog, the Securities and Exchange Board of India (SEBI), has approved a set of rule changes that will make it easier for founders and key employees at start‑ups to keep their employee stock‑option plans (ESOPs) when the company goes public. Founders, investors and advisers have welcomed the move, saying it removes a structural hurdle that often pushed promising young firms to list abroad.
What Has Changed?
Until now, a founder who became a promoter for an IPO was barred from holding ESOPs or other share‑based awards. Any outstanding options had to be exercised or surrendered before the draft red‑herring prospectus (DRHP) was filed. Under the revised framework:
Founders and core team members may now retain ESOPs and convertible securities as long as the grants are at least one year old at the time of filing the DRHP.
No additional ESOPs can be issued to promoters after the company lists, but all existing grants can vest on the original schedule.
ESOP holdings that convert to equity after listing will be counted toward the promoter’s shareholding and remain subject to the regular lock‑in period for promoters.
Why Founders Are Cheering
Many technology start‑ups allocate 8‑15 % of their cap table to ESOP pools. Founders typically hold a slice to preserve “skin in the game” even after their promoter stake is diluted by venture capital rounds. Under the old rule, those unvested options had to be extinguished before an IPO, reducing upside for the people driving growth.
“We were planning to shift our listing venue to the U.S. because our ESOP structure clashed with Indian rules,” said Aman Khurana, co‑founder of health‑tech firm MediBridge. “Now we can keep the listing here and still motivate the leadership bench.”
Venture investors echoed that sentiment, noting that seamless ESOP continuity helps with talent retention during the stressful run‑up to an IPO.
Potential Impact on Market Activity
- More domestic IPOs: Bankers expect up to 25 venture‑backed companies to file DRHPs in the next 12 months, a jump of roughly 40 % over last year.
- Reverse‑flipping deterrent: Several India‑born start‑ups that reincorporated overseas for easier listings may now consider returning to Indian bourses. SEBI simultaneously clarified that equity converted from approved schemes will not require a one‑year seasoning period before sale, smoothing “reverse‑flips.”
- Employee wealth creation: Retained options mean a larger share of eventual listing gains will stay with Indian employees instead of being forfeited before the IPO window opens.
What Companies Must Do Next
- Review Grant Dates: Legal teams must confirm that any ESOP or RSU held by a promoter is at least one year old before filing the DRHP.
- Update DRHP Disclosures: Prospectuses must clearly outline the quantum of options promoters intend to keep and how conversions will affect public float.
- NRC Oversight: The nomination‑and‑remuneration committee must certify that post‑listing vesting schedules do not breach SEBI’s dilution caps.
Failure to comply could still attract penalties, but the compliance burden is materially lighter than before.
Intersection With Other Reforms
The ESOP change was part of a wider June board package that also:
- Permits voluntary delisting of public‑sector companies if the government holding is above 90 %.
- Creates a co‑investment vehicle (CIV) structure for alternative investment funds, letting accredited investors double down on chosen unlisted deals.
- Aligns know‑your‑customer rules for foreign portfolio investors with Reserve Bank of India standards, easing sovereign‑bond inflows.
Taken together, the measures aim to deepen domestic capital formation and keep high‑growth enterprises onshore.
Industry Reaction
Nasscom called the ESOP tweak “a decisive step toward making India the go‑to IPO destination for home‑grown tech.”
Indian Venture Capital Association said it would lobby for further changes, such as allowing limited ESOP refreshes post‑listing for promoters who hit stretch performance goals.
Law firms flagged a transitional workload: “Companies in late‑stage fund‑raise cycles must revisit shareholder agreements and ESOP trust deeds immediately,” noted corporate lawyer Neha Gupta.
Looking Ahead
Market participants expect SEBI to issue a detailed circular within four weeks, spelling out procedural FAQs. Exchanges are likely to update their listing checklists soon after.
For now, founders and employees can plan IPO timelines without fear of losing unvested equity. That single change, insiders say, might do more to keep India’s next unicorns local than a dozen incentive schemes.
