SEBI May Allow Founders To Hold ESOPs Even After Startup Goes Public

SUMMARY

Existing rules require founders to be classified as promoters at the time of filing of DRHP; at the same time, promoters are prohibited from receiving ESOPs

An employee who is subsequently categorised as promoter due to his shareholding, including options, would have to forfeit their benefits, which “may not be justifiable”, SEBI said

SEBI has also proposed extending the exemption from requirement of a minimum holding period of one year to fully-paid up CCPS which are converted to equity shares and offered for sale in OFS

The Securities and Exchange Board of India (SEBI) has proposed allowing startup founders to hold employee stock options (ESOPs) even after the company goes public.

The markets regulator has proposed amendments to the ICDR (Issue of Capital and Disclosure Requirements) Regulations, 2018 and SBEB (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 for founders identified as promoters and sought public feedback.

Founders of new-age tech companies often see their stake getting diluted with each funding round, SEBI said in a consultation paper yesterday.

In order to keep founders incentivised over their diminished shareholding and avoid cash flow constraints, investors and startups often offer ESOPs to founders to help increase their stake and scale their ventures for a longer term.

Currently, SEBI (SBEB & SE) Regulations, 2021 require founders to be classified as promoters at the time of filing of draft red herring prospectus (DRHP). At the same time, Companies (Share Capital and Debenture) Rules, 2014 prohibit promoters and members of the promoter group from receiving ESOPs.

Therefore, a view that an employee who is subsequently categorised as promoter due to his shareholding, including options, would have to forfeit their benefits “may not be justifiable”, SEBI said.

The regulator also underscored that existing rules neither specifically allow or disallow exercise of granted ESOPs (both vested and unvested) when an employee is identified as promoter in the draft paper filed by a company for an initial public offering (IPO).

SEBI’s proposal, if implemented, would allow startup founders to retain share-based benefits granted under various ESOP schemes even if they are classified as promoters in the DRHP.

In a bid to streamline the IPO process, the markets regulator has also proposed giving clarifications on a minimum holding period for equity shares to be eligible for offer for sale (OFS) in the public issue.

Existing rules mandate that full-paid up equity shares may be offered for sale in the OFS if sellers have held them for at least one year before the DRHP is filed. However, there is ambiguity if this applies to equity shares received upon conversion of fully paid-up compulsorily convertible securities.

SEBI has proposed extending the exemption from the requirement of minimum holding period of one year to such fully paid-up compulsorily convertible securities.

This comes amid reports that the market regulator is considering tightening disclosure norms for IPO-bound new-age tech companies, including increasing disclosure timeline for all past transactions and fund raise for startups to 3 years from 18 months currently.

In February, SEBI also proposed scrapping the 200 investor cap for angel funds. The proposal, if implemented, would allow angel funds to tap a larger pool of investors, boosting funding for startups.