Sebi considers Esop relaxation for startup founders ahead of IPOs

According to a consultation paper released on Thursday, Sebi may allow founders to hold or exercise Esop benefits granted one year before the company's initial public offering (IPO) plan

The Securities and Exchange Board of India (Sebi) is considering a key relaxation on the issuance of employee stock ownership plans (Esops) to founders of startups planning to go public.

 

According to a consultation paper released on Thursday, Sebi may allow founders, identified as promoters or part of the promoter group, to hold or exercise Esop benefits granted one year before the company’s initial public offering (IPO) plan.

 

Currently, Esops are reserved for employees, and the Companies (Share Capital and Debentures) Rules, 2014, prohibit their issuance to promoters. However, startups are eligible for certain relaxations.

 

The existing norms are unclear on whether employees holding Esops who later become promoters can exercise these options. To address this ambiguity, Sebi’s consultation paper proposes changes to the regulations.

 

“The classification of a founder as a promoter arises from the practice of considering shareholding, including options that are either vested or granted. These options and other benefits are part of the employee’s remuneration. Thus, the view that an employee who is later categorised as a promoter due to their shareholding, including options and benefits, would have to forgo these benefits may not be justifiable,” Sebi said in the consultation paper.

 

However, the regulator underscored the need for a cooling-off period between option grants and the IPO to prevent misuse. 

"In order to align the interest of the founders, who otherwise hold significantly diluted stake in their own companies, with the performance of the company, ESOPs form a great incentive tool. By allowing such founders to continue holding ESOPs even post reclassification as promoter, provides policy outcome certainty," Vishal Yaduvanshi, Partner (Regional Co-Head - Capital Markets - North), Cyril Amarchand Mangaldas.

 

The proposed relaxation is at a time when the regulator has been asking new age companies planning IPOs to identify promoters, specifically those with significant holdings in the company. 

 

Sebi noted that regulations do not prohibit the conversion of such options once an individual ceases to be an employee.

 

The regulator observed that founders of various new-age technology firms often receive Esops or equity-linked instruments instead of cash benefits in the early years to align their interests with those of other shareholders.

 

The consultation paper also proposed changes to clarify norms on the minimum holding period for equity shares eligible for an offer for sale in public issues. Sebi recommends including equity shares received upon the conversion of fully paid-up compulsorily convertible securities, extending the minimum holding period of one year to these securities. 

Considering Relaxation

 

*  The proposed change would allow founders to exercise ESOPs granted one year prior to the IPO

 

*  Current rules restrict ESOP issuance to promoters, creating ambiguity for founders who were initially employees

 

*  Sebi's consultation paper aims to clarify if founders can retain ESOPs earned as employees