‘Founder friendly’: Startup ecosystem hails Sebi’s move to allow founders to retain ESOPs after IPO

India’s capital markets regulator the Securities and Exchange Board of India (Sebi), on Wednesday, introduced an important reform which eased earlier restrictions on founders of startup companies who are seeking to take their companies public. Sebi approved a long-pending demand from India’s startup ecosystem which now allows founders to retain employee stock options (ESOPs) granted at least one year before filing of the draft red herring prospectus (DRHP) for taking their companies public.

This marks a significant departure from previous rules that barred promoters, including startup founders classified as such at the DRHP stage, from holding or exercising ESOPs, forcing many to liquidate these holdings before going public.

Sebi Chairman Tuhin Kanta Pandey, addressing the media after the conclusion of the regulator’s board meeting, emphasized that the change addresses a longstanding challenge faced by founders, who often rely on ESOPs as a key component of compensation amid multiple rounds of dilution and relatively low salaries.

“The board approved a proposal to facilitate founders who received such benefits at least one year prior to the filing of DRHP to continue holding and exercising such benefits even after being specified as promoters and the company becoming listed,” Pandey said.

As per experts, the reform is expected to ease the path for startups planning IPOs, especially those undertaking reverse flipping, i.e. shifting incorporation from foreign jurisdictions to India, by aligning founders’ incentives with those of public shareholders. To prevent misuse, the rule includes a one-year “cooling-off” period, ensuring ESOPs granted within a year of DRHP filing remain ineligible.

Sebi’s move has been welcomed by the startup ecosystem. The Startup Policy Forum, one of the premier industry bodies that represents more than 50 high-growth Indian startups, praised the regulator’s move and called it ‘founder-friendly.’

“Startup Policy Forum commends Sebi for allowing startup founders to hold or exercise ESOP grants after taking their ventures public, even if they are classified as promoters. This positive reform comes as a big relief to founders of new-age companies as it will enable them to avail skin-in-the-game benefits and align their interests with other shareholders. The one-year cool-off period between grant of ESOPs and the filing of DRHP will ensure the provision is not misused,” the industry body said in a statement.

Alongside ESOP reforms, Sebi also approved measures meant to streamline capital market processes, including simplifying the content requirements for qualified institutional placements (QIPs) to reduce duplication and enhance investor clarity. Additionally, the regulator introduced provisions to facilitate voluntary delisting of public sector undertakings (PSUs) through a fixed-price mechanism, easing government divestment efforts.

These regulatory changes, experts say, reflect Sebi’s broader agenda under Chairman Pandey to improve ease of doing business, boost investor participation, and modernize India’s capital markets amid a growing wave of high-growth startups launching their IPOs.

In fact, in an April 2025 research report put out by the consulting firm, Ernst & Young, in the first quarter of this year, India’s IPO market has held firm, accounting for 22% of global deal activity. With 62 listings raising $2.8 billion, the country, as per EY, has remained one of the world’s most active public markets, defying broader volatility and investor caution.