The Securities and Exchange Board of India (Sebi) is considering a significant relaxation in the issuance of employee stock ownership plans (Esops) to founders of startups that intend to go public.
Sebi may permit founders who are identified as promoters or members of the promoter group to retain or utilize Esop benefits granted a year before the company's initial public offering (IPO), per a consultation paper published on Thursday.
Esops are currently only available to employees, and the Companies (Share Capital and Debentures) Rules, 2014, forbid issuing them to promoters. Startups, however, qualify for specific exemptions.
The current norms are unclear as to whether employees with Esops who later become promoters can exercise these options. To address this ambiguity, Sebi's consultation paper suggests changes to the regulations.
"The classification of a founder as a promoter stems from the practice of taking into account shareholding, including vested or granted options. These options, along with other benefits, are included in the employee's compensation package. Thus, the belief that an employee who is later classified as a promoter due to their shareholding, including options and benefits, must forego these benefits may not be justified," Sebi stated in the consultation paper.
However, the regulator stressed the importance of a cooling-off period between option grants and the IPO to prevent abuse.
"ESOPs are an excellent incentive tool for aligning the interests of founders, who typically hold a significantly diluted stake in their own companies, with the company's performance. Allowing such founders to retain ESOPs even after reclassification as promoters ensures policy outcome certainty," says Vishal Yaduvanshi, Partner (Regional Co-Head - Capital Markets - North), Cyril Amarchand Mangaldas.
The proposed relaxation comes at a time when the regulator has been asking new age companies planning IPOs to identify promoters, particularly those with significant stakes in the company.
Sebi stated that regulations do not prohibit the conversion of such options once an individual ceases to be an employee.
The regulator discovered that founders of various new-age technology firms frequently receive Esops or equity-linked instruments rather than cash benefits in the early years to align their interests with those of other shareholders.
The consultation paper also proposed changes to clarify the minimum holding period for equity shares eligible for sale in public offerings. The Sebi recommends including equity shares received upon conversion of fully paid-up compulsorily convertible securities, extending the minimum holding period of one year to these securities.
