SEBI Eases IPO Norms to Boost Startup Listings and Founder Incentives

In a significant move to encourage startup listings in India, the Securities and Exchange Board of India (SEBI) has introduced key regulatory reforms aimed at easing the IPO process. These changes focus on enhancing founder incentives through employee stock options (ESOPs), simplifying reverse-flipping procedures, and broadening the scope of minimum promoter shareholding contributions.

Founder ESOPs Get a Boost

A major reform involves the treatment of ESOPs held by founders during the IPO journey. Under the previous regime, founders classified as promoters had to forfeit their ESOPs before the company could go public, thereby limiting long-term incentive alignment. SEBI has now revised this, allowing founders to retain and exercise ESOPs—provided they were granted at least one year prior to filing the Draft Red Herring Prospectus (DRHP). This change aligns founder interests with long-term growth and offers greater flexibility during the transition to public markets.

Reverse-Flipping Simplified

SEBI has also addressed challenges associated with "reverse-flipping," a process where startups redomicile their holding structures from foreign jurisdictions back to India. Previously, shares arising from the conversion of Compulsorily Convertible Securities (CCS) were excluded from the Offer for Sale (OFS), limiting liquidity options for early investors. The new rules now allow such converted shares to be included in the OFS, making it easier for startups to raise capital and encouraging more companies to bring their corporate structures back onshore.

Widened Definition of Promoter Shareholding

In a move to ensure smoother compliance with IPO requirements, SEBI has expanded who can contribute toward the minimum promoter shareholding. Where earlier only promoters could use converted CCS to meet this threshold, the updated framework now permits key stakeholders—such as venture capital funds, institutional investors, and banks—to contribute their converted CCS holdings. This change could significantly ease the listing process for startups backed by a diverse investor base.

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Enhanced Transparency and Governance

To reinforce transparency, SEBI has made it mandatory for all key stakeholders—including promoters, senior management, and employees—to hold their shares in dematerialised (demat) form before filing IPO documents. This is expected to reduce the potential for fraud and bolster trust in the public issuance process.

Addressing Past Criticism and Strengthening Oversight

These reforms come in response to earlier criticism around loose IPO norms that enabled financially weak startups to list with minimal scrutiny. SEBI has since tightened its framework, requiring greater disclosure of conflicts of interest involving promoters, directors, and third-party service providers. The latest changes are part of this broader recalibration, aimed at maintaining investor confidence and market integrity.

Outlook for the Startup Ecosystem

These regulatory shifts are poised to benefit a host of Indian startups, including names like Razorpay, Meesho, Groww, and Pine Labs—many of which are gearing up for public listings. Industry estimates suggest that Indian startups could collectively raise up to $10 billion through IPOs in the current financial year.

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