Pre-IPO startups seek Sebi nod for flexibility on Esops to founders

Startups with diluted founder stakes seek Sebi's nod to issue Esops post-listing as they look to retain leadership alignment and reward long-term value creation

Pre-initial public offering (IPO) startups, where founder holdings have slipped to low levels, have sought flexibility from market regulator Securities and Exchange Board of India (Sebi) in issuing employee stock options (Esops) to them.

 

A fintech startup planning an IPO had written to Sebi in April, seeking relaxation in issuance of Esops to founders, especially post listing, said people aware of the development.

 

At present, Sebi norms do not allow issuance of Esops to promoters of a company.

 

However, the regulator recently proposed relaxation under which founders, identified as promoters or part of the promoter group, may hold or exercise Esop benefits granted one year before the company’s decision to undertake an IPO.

 

There are certain exemptions for startups on Esops while they are unlisted. In most cases, the founders are categorised as ‘promoters’ before filing of the draft documents for IPO, considering their control and rights in the company.

 

Legal players said that due to several rounds of funding at different stages of growth, the founders’ stakes may get diluted to very low levels.

 

In such cases, the company can offer Esops to incentivise founders to keep them motivated.

 

“While the move to allow existing incentives to be carried forward beyond listing for founders (subject to conditions) is a step in the right direction, it may be worthwhile to consider if founders can be incentivised post listing as well. Startup founders are usually the brains behind a business. So, it may be in the interests of the shareholders and the issuer to keep them incentivised so that they are able to carry on the good work post listing,” said Kaushik Mukherjee, partner, IndusLaw. 

 

Another expert from the venture capital industry said that certain startups which have reverse flipped to India may look for such relaxations. This is because they enjoyed more flexibility around Esops in countries such as the US.

 

In India, along with Sebi norms, the Companies Act also restricts issuance of Esops to promoters and directors holding over 10 per cent stake.

 

Emailed queries sent to Sebi on the application of the fintech remained unanswered till the time of publication. Following Sebi’s notice, another fintech founder recently had to forego Esops worth over ₹1,800 crore.

 

Legal experts said that though companies may see Esops as one way to motivate or compensate founders who have to take on multiple obligations after listing, the chances of Sebi granting a relief are slim.

 

“Post listing, the value of shares is a function of the market and the motivation for the promoter of a listed company is presumably different. The question may also arise of parity and how the founder of a startup which is listed can be differentiated from founders of other listed companies,” said Archana Tewary, partner, JSA Advocates & Solicitors.

 

Akshat Khetan, founder, AU Corporate Advisory and Legal Services, said that Sebi’s approach is to have uniformity in the ecosystem while keeping the norms in the interest of retail and institutional investors.

 

“Irrespective of the stake, the categorisation as promoter or a founder brings many more responsibilities. It has a wider reference to the growth of the company. We cannot just associate it with any present percentage or categorise on the basis of the holding vis-à-vis the overall stake in the company,” he added.