ESOPs: Market regulator Sebi could tweak regulations for start-ups

Sebi does not want founders to own stock options if they have rights akin to those enjoyed by promoters, the sources with direct knowledge of the matter said

2 min read Last Updated : Mar 17 2023 | 11:12 PM IST

The Securities and Exchange Board of India (Sebi) is planning to change its rules to address concerns around founders and family members of tech or app-based start-ups owning shares under the employee stock ownership plan (ESOP), two sources told Reuters.

Sebi does not want founders to own stock options if they have rights akin to those enjoyed by promoters, the sources with direct knowledge of the matter said.

A decision in this regard could come sometime this year, the sources added.

Under present laws, promoters hold direct and indirect control over the company, advise, direct, and instruct the board of directors, and have the right to nominate directors to the board, but are barred from owning ESOPs.

"In new-age tech companies, founders have reduced their shareholding to below 10 per cent and have stayed away from the promoter tag,” the first source said.

The regulator is examining the gap in the law and whether it is being misused, the source added.

One key example has been One97 Communications, popularly known as Paytm, whose founder, Vijay Shekhar Sharma, owned 14.7 per cent equity a year before filing to go public in 2021.

As per current regulations, “a director who either himself, through his relative or any corporate body, directly or indirectly, holds more than 10 per cent of the outstanding equity shares of the company” is not eligible to receive stock options.

Sharma reduced his shareholding to 9.1 per cent by transferring 30.97 million shares to Axis Trustee Services Limited, acting on behalf of the Sharma family trust in 2021, which made him eligible to receive shares under the ESOP.

This seems like an instance unique to Paytm, where the trust route has been used to reduce direct equity holding to below 10 per cent, the second source said.

“The intention of the regulations is to include all structures for equity holding. This is a gap which needs to be plugged, it will be done via an amendment to Sebi’s stock options rules,” the source added.