SEBI Unlocks Founder ESOPs for IPO Journey
Securities and Exchange Board of India (SEBI) has issued crucial clarity on founder Employee Stock Option Plans (ESOPs), a move set to streamline Initial Public Offerings (IPOs) for numerous startups. The regulator's latest amendment ensures that founders can retain and exercise ESOPs granted at least one year before the draft offer document is filed, even after their reclassification as promoters.
Resolving Regulatory Ambiguity
Previously, a regulatory gap existed. While founders could receive ESOPs as part of their remuneration during a company's private stages, uncertainty loomed over whether these benefits could be exercised post-listing, especially after they were designated as promoters. This ambiguity created practical hurdles for both founders and companies structuring incentive plans.
The Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) (Amendment) Regulations, 2025, notified on September 8, 2025, following SEBI's Board Meeting on June 18, 2025, directly addresses this. The amendment, stemming from a public consultation initiated in March 2025, introduces Regulation 9A into the SBEB Regulations.
New Regulation 9A Details
Regulation 9A stipulates that an employee identified as a 'promoter' or part of the 'promoter group' in the draft offer document can continue to hold and/or exercise options, Stock Appreciation Rights (SARs), or other benefits if they were granted at least one year prior to the draft offer document filing. This provision is subject to the terms of the grant and compliance with applicable laws.
The one-year cooling-off period is a significant safeguard. It ensures ESOPs are tied to long-term incentives rather than being used for short-term gains just before a listing. This measure also prevents founders from benefiting from ESOP issuances made immediately prior to an IPO, thereby protecting investors and maintaining capital structure fairness.
Lessons from Paytm Case
The importance of such safeguards was highlighted in the Paytm case. Founder Vijay Shekhar Sharma had transferred shares to a family trust shortly before the company's 2021 IPO and was classified as a non-promoter, which could have allowed him to secure ESOPs that might otherwise have been impermissible. SEBI alleged a violation of SBEB Regulations, leading to a settlement in May 2025 where Sharma surrendered ESOPs worth over INR 1,800 Crore and accepted a three-year ban on receiving new ESOPs from any listed company. This instance underscores the critical role of regulatory oversight and cooling-off periods.
Fostering Market Trust
With Regulation 9A now in effect, founders and startups gain much-needed clarity. This reform is expected to foster greater trust and transparency within India's capital markets, encouraging more companies to pursue IPOs while ensuring legitimate long-term incentives for management are preserved and investor interests are protected.