News
ESOP Relief for Founders: SEBI Approves Key Change at 210th Board Meeting
In a welcome move, the Securities and Exchange Board of India (SEBI) has approved a proposal allowing founders to retain and/or exercise ESOPs even after being specified as promoters and the company becoming a listed entity, provided such ESOPs were granted at least one year prior to the filing of the draft red herring prospectus (DRHP) with the Board.
This decision was taken at the 210th Board meeting held on June 18, 2025. The approval follows the public consultation undertaken in March 2025, factors in the feedback received from stakeholders, and is based on deliberation by the Primary Markets Advisory Committee.
Background
In many new-age tech companies, successive rounds of investments lead to dilution of founders’ shareholding. To mitigate this and maintain long-term alignment, companies and their investors typically offer ESOPs to founders. These incentives not only help avoid cash flow strains (by reducing reliance on high remuneration), but also act as performance-linked rewards to keep founders motivated and invested in scaling the business.
As a result, it is common for founders to receive ESOPs or equity-linked instruments instead of cash-based remuneration, especially in the early stages of a company. This practice also ensures their interests are aligned with those of other shareholders.
Current Framework
- Unlisted Companies: The provisions of the Companies (Share Capital and Debentures) Rules, 2014, do not permit the issuance of ESOPs to promoters. However, this restriction is not applicable to start-up companies up to ten years from the date of their incorporation or registration. It follows that promoters of eligible startups can be granted ESOPs while the company remains privately held.
- Listed Companies: Under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, promoters are ineligible to hold or be granted share-based benefits, including ESOPs. Any such share-based benefits held at the time of DRHP filing are required to be liquidated prior to the IPO.
SEBI’s New Decision
Recognising the impact of the existing provision, the SEBI Board has now approved a proposal to permit founders to retain and/or exercise such benefits even after being specified as promoters and the company becoming a listed entity, provided the benefits were granted at least one year prior to the filing of the DRHP with the Board.
This move provides much-needed regulatory clarity and supports long-term founder incentives in IPO-bound companies.
