Securities and Exchange Board of India (SEBI) has released a consultation paper proposing significant amendments to the rules governing Employee Stock Options (ESOPs) for promoters and the minimum holding period for equity shares in Offer for Sale (OFS).
These proposals aim to streamline public issue norms and address ambiguities in existing regulations.
They also focus on ensuring consistency in the treatment of shares obtained through various mechanisms.
SEBI has invited public comments on these proposals until April 10, 2025.
Proposed Changes to ESOP Rules by SEBI
Under the current Share Based Employee Benefits (SBEB) Regulations, promoters cannot receive ESOPs. This restriction also applies to members of the promoter group.
However, SEBI has noted that this restriction creates challenges for founders who are later classified as promoters during the filing of the Draft Red Herring Prospectus (DRHP).
To address this, SEBI has proposed the following clarifications:
- Continuation of ESOP Benefits: Founders who are granted ESOPs before being classified as promoters in the DRHP will continue to enjoy these benefits. This ensures that founders remain incentivized even after their classification changes.
- Cooling-Off Period: To prevent misuse, SEBI has suggested a one-year cooling-off period before these ESOPs can be exercised. This aligns with the principle of long-term commitment and avoids potential exploitation of the system.
These changes are particularly relevant for new-age tech companies, where founders often see their shareholding diluted with each round of investment.
By allowing founders to retain ESOP benefits, SEBI aims to keep them motivated and invested in the company’s growth.
SEBI Clarifies on Minimum Holding Period in OFS
SEBI has also proposed amendments to the rules governing the minimum holding period for equity shares in OFS.
Currently, equity shares offered in a public issue must be held for at least one year before the draft offer document is filed.
However, there is ambiguity regarding shares obtained through the conversion of fully paid-up compulsorily convertible securities under approved schemes.
To address this, SEBI has proposed:
- Inclusion of Convertible Securities: The holding period for both fully paid-up compulsorily convertible securities and the resulting equity shares will be considered. This extends the exemption from the one-year holding period to such securities.
- Harmonization of Rules: The proposed amendments aim to align the eligibility criteria for OFS and Minimum Promoter Contribution (MPC) requirements, ensuring consistency across different scenarios.
The rationale for these changes is to promote transparency, reduce ambiguities, and ensure long-term shareholder commitment.
By addressing the gaps in existing regulations, SEBI aims to create a more robust framework for public issues and share-based employee benefits.
Industry Reactions
The proposals have been welcomed by industry experts, who view them as forward-looking and pragmatic.
Kaushik Mukherjee, a partner at Induslaw, described the changes as a step toward bridging regulatory gaps.
“These amendments provide clarity and allow stakeholders to plan accordingly,” he said.
Payal Agarwal, a senior associate at Vinod Kothari & Company, highlighted the importance of incentivizing founders in new-age companies.
“The proposed changes ensure that founders remain motivated despite shareholding dilution, which is crucial for scaling ventures,” she noted.
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