SEBI Eyes ESOP Exercise for Founders Classified as Promoters

To fill a gap in the existing framework, the Securities and Exchange Board of India (SEBI) has proposed allowing founders of IPO-bound companies, classified as promoters in the draft offer document, to exercise employee stock option plans (ESOPs) granted before the filing.

Currently, promoters are expressly excluded from the definition of ‘employee’ both under company law and securities law and are not entitled to receive ESOPs. However, there is no express provision shedding light on whether employees holding ESOPs, who are later categorised as promoters, can exercise their granted ESOPs. It is now suggested to add an explanation to address this gap.

Upon an individual ceasing to be an employee, Regulation 9(6) of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, comes into play and the proviso to this Regulation states that such employees are entitled to retain vested ESOPs. Moreover, the explanation to said Regulation clarifies that in cases of retirement or superannuation, ESOPs granted but not vested will also continue to vest as per the vesting schedule even after retirement or superannuation. Against this backdrop, SEBI noted that the classification of employees as promoters due to their shareholding, including options or benefits, which form part of their remuneration, should not require them to forgo their benefits.

Consequently, SEBI now proposes to add a second explanation to Regulation 9(6) clarifying that employees identified as promoters in the draft offer document, who were granted ESOPs prior to being identified as promoters will be eligible to continue to hold, exercise or avail such ESOPs. Anticipating possible misuse of the provision, it is suggested that a cooling-off period of one year be maintained between the grant of ESOPs and the time when the company decides to pursue an IPO.