SEBI Eases Start-Up Rules for ESOPs, Reverse Flipping, AIFs

The Securities and Exchange Board of India (Sebi) has approved a series of reforms aimed at improving the ease of doing business. The Indian capitals market regulator made the announcement at the 210^th meeting in Mumbai on Wednesday.

Key changes include allowing start-up founders to continue holding employee stock options (ESOPs) after listing, opening up co-investment avenues for alternative investment funds (AIFs), and enabling the voluntary delisting of public sector enterprises.

As per existing regulations, founders must be designated as promoters when filing the DRHP for IPO. However, once classified as promoters, they become ineligible to hold or receive share-based benefits such as ESOPs. If they posses ESOPs at the time of filing, they are required to forfeit them ahead of the IPO.

The new rule, in contrast, will facilitate founders who received such benefits at least one year before filing the DRHP with the market regulator in continuing to hold these benefits.

It also clarified that new ESOPs could not be issued to promoters after the company is listed on the bourses.

Sebi on Reverse Flipping, AIFs

The market watchdog, in addition, also extended the scope of relaxation related to the one-year minimum holding period for shares acquired through an approved scheme to qualify for the offer-for-sale (OFS) segment.

With the latest amendment, this exemption will now also apply to shares arising from the conversion of compulsorily convertible securities (CCS) issued under such approved schemes.

Sebi has also given the green light to a proposal permitting AIFs, foreign venture capital investors, and other entities within the promoter group, provided they hold at least 5% of the post-issue capital, to contribute equity shares, arising from the conversion of CCS, towards meeting the minimum promoter contribution requirement.

The board also approved a proposal allowing Category I and Category II Alternative Investment Funds (AIFs) to launch co-investment (CIV) schemes. Co-investment enables select investors in AIFs to invest directly in startups on a personal level, in addition to their participation through the fund itself.