Sebi mulls clarifying ESOP rules for promoters; minimum holding term in OFS

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With an aim to streamline the processes for public issues, markets regulator Sebi on Thursday proposed giving clarifications on minimum holding period for equity shares in Offer for Sale (OFS) as well as on employee stock options (ESOPs) for founders classified as promoters.

In its consultation paper, the regulator proposed amendments to the ICDR (Issue of Capital Disclosure Requirements) rules and Sebi (Share Based Employee Benefits and Sweat Equity) norms.

The proposals, if implemented, would ensure that the rules are clear and consistent, aligning the eligibility for Offer for Sale (OFS) and Minimum Promoter Contribution (MPC) requirements. The proposals aim to harmonise the treatment of shares obtained through different mechanisms such as compulsory conversion of securities or approved schemes.

On minimum holding period for equity shares in OFS, Sebi has suggested amendments in the rules to clarify that the holding period for both the fully paid-up compulsorily convertible securities and the resulting equity shares should be considered, thereby extending the exemption from the one-year holding period if the shares were obtained through an approved scheme.

Under the current rules, equity shares offered in a public issue are required to be held for at least one year before the draft offer document is filed. However, there is ambiguity about whether this rule applies to equity shares obtained after converting fully paid-up compulsorily convertible securities (like depository receipts).

Also, Sebi has proposed to clarify regarding ESOPs granted before filing the Draft Red Herring Prospectus (DRHP) to founders who are promoters at the time of filing. "It is proposed that an explanation may be added to state that share based benefits granted to founders would continue upon such founder being classified as promoter in the DRHP," the regulator said.

The requirement of no new issuances under Share Based Employee Benefit Scheme to promoters would continue being applicable to such founders who are categorised as promoters, it added.

Currently, SBEB Regulations neither specifically allow nor disallow exercise of granted ESOPs (both vested and unvested) when an employee holding such ESOPs is subsequently categorised as promoter.

The Securities and Exchange Board of India (Sebi) has sought public comments till April 10 on the proposals.