The Securities and Exchange Board of India’s (SEBI) recent move allowing startup founders to retain their Employee Stock Option Plans (ESOPs) and Stock Appreciation Rights (SARs) even after their companies file for an initial public offering (IPO) has been welcomed by startups and industry experts—hoping for this to bring in capital and encourage reverse flipping to India.
Under the earlier regime, founders who held more than 10 per cent equity and were classified as promoters could not retain ESOPs once their company filed the draft red herring prospectus (DRHP). This often led to rushed restructuring, capital inefficiencies, or incorporation in foreign jurisdictions, said industry experts.
SEBI has now allowed founders to hold ESOPs or SARs if granted to them up to one year before filing the DRHP. The reform comes when policymakers are looking to boost domestic listings and reverse the trend of startups flipping to foreign domiciles like the US or Singapore.
Capital inflow boost
The industry body Startup Policy Forum (SPF) and the Indian Venture and Alternate Capital Association (IVCA) have lauded the move and expect an increase in the flow of private and domestic capital to startups, enabling founders to have skin in the game.
“This decision enables more realistic equity mapping and encourages founders to think long-term. It not only empowers startups to retain key talent through transparent ESOP structuring but also builds stronger alignment with investors early in the IPO journey,” said Priyanka Madnani, founder and CEO of Terex Ventures. “This move enhances India’s IPO-readiness environment, making it more attractive for founders to stay or even return their holding structures to India, thus actively promoting reverse flipping.”
Nearly 20 startups are currently in various stages of their IPO journey, including Flipkart, PhonePe, Zepto, Pine Labs, among others, who can now expect smoother public listings, better equity structuring, and more long-term alignment between founders and shareholders.
“Founders spend 7-12 years building a business that goes for an IPO during which they take minimum salary and a lot of equity dilution, especially in bear markets,” said Kushal Bhagia, founder of All In Capital. “Allowing them to retain ESOPs will ensure that the founder feels incentivized to continue growing the business post IPO, which is in the best interest of investors as well.”
Regulatory mindset shift
For many in the ecosystem, the move signals more of a mindset shift than regulatory easing. SEBI’s ESOP relief aligns incentives for founders to build from India, not just for India, and also lowers compliance friction, empowering companies to stay or return to India through reverse flipping, said Ankit Kedia, founder and lead investor at Capital-A. “It’s a small but significant policy nudge that recognizes startups as value creators in the long term, not just regulatory headaches,” Kedia said.
This change is especially beneficial to founders registered with the Department for Promotion of Industry and Internal Trade (DPIIT), exempt from certain restrictions on promoters and directors under the Companies Act, 2013, Vinay Joy, a partner at Khaitan & Co, said.
The Companies Act, 2013, generally prevents promoters or directors holding more than 10 per cent of a company’s equity from being classified as employees eligible for stock options. However, startups registered under the Startup India initiative are exempt from this restriction and can issue ESOPs to their founders and directors, even if they hold more than 10 per cent of the equity. Despite this exemption, they had to liquidate these options when their companies went for an IPO due to SEBI’s restriction, which has been removed now.