SEBI Eases ESOP Regulations for Founders of Startups Going Public

The Securities and Exchange Board of India (SEBI) has introduced a major relaxation for startup founders preparing to list their companies. The regulator has now allowed promoters to retain employee stock options (ESOPs) or similar benefits if these were granted at least one year prior to the filing of draft IPO papers. The decision is expected to provide significant relief for founders, who were previously required to surrender such benefits before an initial public offering.

New Framework for ESOPs and Promoter Eligibility 

Under the revised guidelines, promoters can continue to hold ESOPs, stock appreciation rights (SARs), or other share-based benefits as long as they were issued at least a year before submitting draft IPO documents. SEBI’s notification clearly states:

“An employee who is identified as a 'promoter' or part of the 'promoter group' in the draft offer document filed by a company with the Board in relation to an IPO, and who was granted options, SAR (Stock Appreciation Rights) or any other benefit under any scheme at least one year prior to filing of the draft offer document, shall be eligible to continue to hold and/or exercise such options, SAR or any other benefit.”

Previously, promoters were barred from holding or being granted such benefits. Any ESOPs already in their possession had to be liquidated before IPO filings, a provision that proved restrictive for startup founders.

Broader Impact and Earlier Relief Measures

The latest move is expected to ease the listing process for public companies, especially those undergoing reverse flipping, where firms shift their incorporation from overseas jurisdictions back to India. 

This relaxation follows SEBI’s earlier reforms announced in June 2025, when founders were permitted to retain ESOPs post-listing, co-investment rights were extended to Alternative Investment Funds (AIFs), and voluntary delisting was allowed for public sector enterprises.

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Conclusion

By addressing long-standing hurdles around ESOP retention, SEBI has offered startup founders greater stability and confidence as they approach the public markets. The change ensures that equity incentives, which are central to entrepreneurial growth, remain intact while aligning with India’s goal of encouraging more startups to list domestically.

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