In a major relief for startups, the Securities and Exchange Board of India has allowed founders to hold on to their stock options, which were issued to them a year prior to going in for an initial public offer, with certain conditions attached.

Under existing regulations, promoters are not eligible to retain or hold share-based benefits, including ESOPs. If they hold such benefits at the time of filing the draft prospectus, they must liquidate them prior to the IPO.

“This provision has been found to be impacting founders classified as promoters at the time of filing of DRHP,” the regulator said in a release after its board meeting.

Allowing startup founders to retain their ESOP benefits will help founders who received such benefits at least one year before the filing of the draft prospectus to continue holding them or even exercising these options even after being specified as promoters and the company becomes a listed entity.

At the time of filing for a public listing, founders have to be classified as promoters but then the rules do not allow issue of share-based benefits including ESOPs to them.

Addressing the media after the board meeting, Sebi Chairman Tuhin Kanta Pandey said the relaxation in the ESOP norms could convince them to come to the public markets.

SEBI issued a consultation paper in March of this year to ease ESOP norms for founders of startups.

Reverse Flipping

In another major move to encourage startups to return to India, the regulator has made it easier to ‘reverse flip’—that is, shift the country of incorporation from a foreign jurisdiction to India.

At present, regulations exempt the requirement of a minimum holding period of one year only for shares acquired following an approved scheme to be eligible for the offer-of-sale component in a public issue. This exemption is not available for shares from conversion of compulsorily convertible securities issued under such an approved scheme.

“This has resulted in certain investors not being able to participate in the Offer for Sale in public issue,” said SEBI. “Extending the exemption to equity shares arising from conversion of fully paid-up CCS received pursuant to approved scheme will facilitate such participation. This will assist the companies contemplating reverse flipping,” it said.

Published on June 18, 2025