On June 18, 2025, the Securities and Exchange Board of India (SEBI) took a major step toward boosting the Indian startup ecosystem. It introduced critical amendments to its Employee Stock Option Plan (ESOP) regulations, allowing startup founders to retain their vested and unvested ESOPs even after being classified as promoters during the IPO process.
This move addresses a long-standing challenge that restricted founders from accessing equity benefits just when their companies reached the threshold of a public listing. With this regulatory reform, SEBI sends a clear message: it wants to encourage high-growth startups to go public without forcing their core visionaries— the founders— to forfeit their hard-earned ownership.
What Has SEBI Changed?
Earlier, the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 barred promoters from receiving ESOPs. Once a founder transitioned into a promoter role, especially during the Draft Red Herring Prospectus (DRHP) filing, they lost eligibility to receive or exercise ESOPs. Founders who worked for years, often drawing minimal salaries in exchange for long-term equity, found themselves disqualified from reaping those benefits at the crucial moment of an IPO.
SEBI has now amended this restriction. Under the new rules, founders—despite being classified as promoters—can retain and exercise ESOPs if they received them at least 12 months before filing the DRHP. However, they still cannot receive new ESOP grants after attaining promoter status or post-listing.
This 12-month buffer ensures that only long-standing equity compensation remains eligible. It eliminates the risk of companies issuing ESOPs just before an IPO to inflate ownership or reward short-term insiders. SEBI has carefully struck a balance between rewarding long-term commitment and preserving shareholder trust.
Why Did SEBI Make This Move?
1. Preserving Founders’ Incentives
Many startup founders accept low cash compensation in early stages and rely heavily on ESOPs as their primary wealth creation mechanism. When SEBI’s earlier rules forced them to relinquish those ESOPs upon promotion, it disincentivized founders from staying motivated through the IPO phase. It also created cap table inconsistencies and hurt post-IPO governance by reducing founder stake.
The latest amendment reverses this consequence. Now, founders can retain the ESOPs they earned as employees, allowing them to enjoy the same financial upside as institutional investors and employees.
2. Encouraging More IPOs
India’s booming startup landscape has created over 100 unicorns in the past five years. However, IPO conversion remained sluggish. One key reason was regulatory inflexibility regarding ESOPs and ownership control.
By allowing ESOP continuity for founders, SEBI removes a significant psychological and financial roadblock. This reform could prompt many pre-IPO companies, especially those in tech, fintech, and e-commerce, to accelerate their listing plans.
3. Enhancing Transparency and Governance
SEBI paired its leniency with structure. The 12-month lookback ensures no company can misuse the amendment to push last-minute equity awards disguised as founder compensation. This maintains investor confidence and safeguards governance standards.
Wider Reforms Announced Alongside ESOP Rule Changes
At its June 18 board meeting, SEBI also rolled out a set of broader capital market reforms. These include:
1. New Voluntary Delisting Framework for PSUs
SEBI introduced a special delisting mechanism for government-owned companies where the central government holds 90% or more equity. In these cases, the company can delist at a fixed price that is at least 15% above the floor price, without needing to conduct the usual reverse book-building process. This aims to streamline the process for select Public Sector Undertakings (PSUs) and reduce regulatory burdens in such cases.
2. Relaxation for Foreign Portfolio Investors (FPIs) in Government Bonds
SEBI removed the requirement for FPIs, who invest exclusively in Indian government securities, to disclose the granular structure of their ownership. Since such FPIs pose minimal market risk and show long-term commitment to India’s debt markets, SEBI streamlined compliance for them.
As of March 2025, FPIs’ holdings in Indian government bonds have surged to ₹3 trillion, indicating strong global confidence in India’s macroeconomic stability.
3. Changes to Investment Trusts and Alternative Funds
SEBI also introduced reforms for Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), and Alternative Investment Funds (AIFs). For Category I and II AIFs, co-investment rules now offer more clarity and uniformity in terms of exit rights, aligning them with global best practices.
4. Full Dematerialization Push
SEBI announced that companies preparing for IPOs must ensure complete dematerialization of their shareholding structure. This move aligns with India’s long-term goal of achieving 100% paperless securities and improving investor confidence.
Why This Is a Game-Changer for Indian Startups
India’s startup founders often play multiple roles—innovators, operators, product leads, and financial architects. They rarely draw market-rate salaries. Instead, they pour their energy into long-term value creation, usually with ESOPs as a deferred reward.
Earlier, when SEBI stripped promoters of ESOP eligibility, it punished these same founders for their success. As their companies matured into IPO-ready ventures, founders lost ownership stake, creating disillusionment and legal gymnastics around reclassifications or share transfers.
With this change, SEBI has removed the contradiction. Now, founders can retain their ESOPs if granted a year prior to DRHP filing. This maintains founder ownership, ensures reward for loyalty, and builds a cleaner cap table post-listing.
Global Context: Aligning with Best Practices
Globally, regulators in markets like the U.S., U.K., and Singapore do not restrict ESOP access for founders post-IPO. In fact, founder equity retention is considered a positive signal for public investors. By aligning with this approach, SEBI brings Indian markets closer to global benchmarks.
This move also resonates with SEBI’s broader goal of making Indian capital markets more founder-friendly, while maintaining transparency, discipline, and investor protection.
Key Considerations for Stakeholders
For Founders:
- Review all ESOP grants and ensure they occurred at least 12 months before DRHP filing.
- Avoid fresh ESOP allocations once declared as promoters.
- Communicate proactively with investors and employees about cap table changes.
For Compliance Teams:
- Update ESOP policy documentation immediately.
- Track grant and vesting timelines to ensure full regulatory compliance.
- Prepare DRHP disclosures carefully, especially around promoter shareholding and vesting schedules.
For Investors:
- Monitor cap table evolution pre- and post-IPO.
- Evaluate founder retention and stake preservation as part of due diligence.
- Assess whether companies have respected the 12-month cooling-off rule.
Conclusion: Building a Smoother IPO Road for Startups
SEBI’s decision to ease ESOP restrictions for startup founders before IPOs reflects a bold and thoughtful shift in regulatory approach. It recognizes the unique challenges of the startup world, where founder equity acts as both reward and responsibility.
By supporting ESOP continuity while preserving governance safeguards, SEBI has given Indian founders a stronger incentive to list their companies publicly. This reform may spark a new wave of IPOs across India’s thriving tech and digital economy—attracting capital, rewarding innovation, and deepening investor participation in the country’s economic future.
As India continues to evolve into a global startup powerhouse, these regulatory advancements signal that the country’s capital markets are finally adapting to the entrepreneurial realities of the modern economy.
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