In a move that will allow startup founders, who are classified as promoters, to keep or use their ESOPs (employee stock options) even after filing for an IPO, if they received them at least one year before filing the draft red herring prospectus (DRHP), Sebi in its meeting today approved that founders could now continue to hold or exercise such benefits even after a company is listed.

Under the existing regulations, promoters were ineligible to hold or be granted share-based benefits, including ESOPs. If they held such share-based benefits at the time of filing of draft red herring prospectus, they had to liquidate such benefits before the IPO.

Sebi says this provision has been "found to be impacting founders classified as promoters" at the time of filing of the DRHP. The proposal approved by the Sebi board will facilitate founders who received such benefits at least one year before the filing of DRHP with the board, to continue holding, and/or exercising such benefits even after being specified as the promoter and the company becoming a listed entity.

"These proposals are expected to (i) assist public companies who are intending to list after undertaking reverse flipping (i.e. shifting the country of incorporation from a foreign jurisdiction to India) and (ii) relax certain requirements relating to share based benefits granted to founders before the company undertaking the IPO," says the regulator.

Jyoti Prakash Gadia, MD at Resurgent India, an A-category 1 merchant bank, terms Sebi's measures as "reformist changes", which will have a "far reaching impact" on the economy. "The new liberalised guidelines relate to a wide range of issues, which were under discussion as desired by the industry participants, including ESOP for founders and equity status for InvITs and REITs. The announcement on ESOPs will incentivise the founders to put in their efforts and capabilities beyond the IPO stage and create real long-term value for the company as well," says Gadia tells Fortune India.

The regulator says these proposals were prepared after public consultation undertaken in March 2025, followed by deliberation by the Primary Markets Advisory Committee and factoring in the feedback received on the public consultation.

Sebi has amended its regulations -- SEBI (ICDR) Regulations, 2018 and SEBI (SBEB) Regulations, 2021 -- to relax certain requirements related to public issue, with the objective of ease of doing business.

Besides, the regulator says the existing regulations exempt the requirement of a minimum holding period of one year only for equity shares acquired after an approved scheme to be eligible for offer for sale in a public issue. The exemption is not available for equity shares arising out of the conversion of fully paid-up compulsorily convertible securities (‘CCS’) received under such approved scheme, which has resulted in certain investors not being able to participate in the OFS in a public issue. "Extending the exemption to equity shares arising from the conversion of fully paid-up CCS received under the approved scheme will facilitate such participation. This will assist the companies contemplating reverse flipping."

Additionally, under the existing regulations, certain relevant persons are permitted to contribute their equity shares towards the minimum promoter contribution (‘MPC’) requirement (apart from the promoter). While promoters are allowed to contribute equity shares arising from the conversion of fully paid-up CCS for MPC, such provision is absent for such relevant persons. "This amendment, approved by the Board, will allow contributions by such relevant persons as well."

Such relevant persons are: AIFs, foreign venture capital investors, scheduled commercial banks, public financial institutions, insurance companies registered with IRAI, any non-individual public shareholder holding at least 5% of the post-issue capital or any entity (individual or non-individual) forming part of the promoter group other than the promoter.