Explained: Sebi's new Esop norms for IPO-bound startup founders
Capital markets regulator Securities and Exchange Board of India (Sebi), in a board meeting on June 18,
greenlit multiple measures to enable
"ease of doing business". One of them was relaxing norms around employee stock options (Esops) for startups heading to Dalal Street.
Here is a look at the rules and the updates:
As per the new rules, Sebi is allowing startup founders to continue holding Esops even after their company lists on the stock exchange.
What was the old rule?
Previously, it was mandated that founders be classified as "promoters" when filing their initial public offering (IPO) documents. After that, they would be ineligible to hold or be granted share-based benefits such as Esops. If they held shares before the IPO, they had to liquidate them.
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Founders found this provision impacted them negatively. Because of these rules, they could not benefit from their company's potential long-term growth through their stock options after listing and had to sell their holdings at a less mature stage in the company's life.
Many felt the rule was unfair. In their early stages, startups often compensate founders with Esops instead of high salaries to conserve cash and align their interests with shareholders. However, as companies secure investments, founders see their equity stake getting diluted. The old rule effectively penalised them for their ownership stake ahead of an IPO.
What are the changes?
The regulator said the new rule would facilitate founders who received Esops at least one year prior to the filing of the draft red herring prospectus (DRHP) to continue to hold such benefits.
Why the change?
Sebi has acknowledged the ambiguity in the old regulations. The markets watchdog stated that requiring an employee, later classified as a promoter due to his/her shareholding and options, to forgo these benefits may not be justified.
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