SEBI Suggested Some Amendments in Rules for ESOPs, Aims to Support New Businesses

The Securities and Exchange Board of India (SEBI) has recommended a few amendments to the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2023. The amendments basically aim to support new business founders towards an Initial Public Offering (IPO). Additionally, changes assist founders to maintain and perform their Employee Stock Options (ESOPs) Schemes even if they are categorised as promoters, a status that earlier disqualified them from ESOP advantages under existing regulations.

As per the previous rules, SEBI rules restrict promoters or members of the promoter group from getting ESOPs, treating these incentives as meant only for employees. But, IPO-bound firms regularly recategorise founders as promoters before listing and forming a grey region around their eligibility to hold or perform granted ESOPs.

On Thursday, dealing with this regulatory uncertainty, SEBI issued a consultation paper, stating that ESOPs were given a minimum of one year before the company’s IPO announcement, founders should be given authority to begin holding and using them, even if they are recategorised as promoters later on.

In order to avoid possible misuse of this rule amendment, it is suggested to have a gap between when ESOPs are given and when a small company announces its IPO. This helps make sure the benefits go only to genuine cases where ESOPs were truly part of the company’s long-term pay plan and not just given to take advantage of gains from the upcoming IPO.

This forward-looking move by SEBI aims to give clear guidance and encourage startup founders who have played a big role in growing their companies but are held back by existing rules.

Startup companies and legal experts like Compliance Calendar LLP have praised the move, saying the change could help keep talented people and reward founders for taking risks, without breaking SEBI’s rules.