Employee stock option plans (“ESOPs”) have become one of the most important tools for attracting, retaining and incentivizing talent, particularly in high-growth companies. These equity-linked instruments not only boost founders’ holdings but also serve as performance-linked incentives, motivating them to scale their ventures while aligning their interests with those of other shareholders.
Founders of startups are often granted ESOPs as part of their remuneration while the company is still private. However, where such founders were subsequently classified as promoters in the run-up to an initial public offer (“IPO”), the regulatory framework did not clearly address whether these pre-existing share-based benefits could continue post-listing. This uncertainty created practical challenges for founders transitioning into promoter roles.
In a positive development, pursuant to the decision taken at SEBI’s 210th Board Meeting (“SEBI Board Meeting”) on June 18, 2025, the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) (Amendment) Regulations, 2025 were notified on September 8, 2025, thereby clarifying that founders may retain and exercise ESOPs even after being designated promoters and the company becoming a listed company, provided such options were granted at least 1 (one) year before the filing of the draft offer document. This development followed a public consultation through a consultation paper released earlier in March 2025 (“Consultation Paper”) and consideration of stakeholder feedback.
Companies Act, 2013
Section 62(1)(b) of the Companies Act, 2013 permits the issuance of shares under an ESOP scheme, subject to Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 (the “Share Capital Rules”), which excludes promoters, members of the promoter group, and directors holding more than 10% (ten per cent) equity.
Carve-out for start-ups: The Ministry of Corporate Affairs, in 2016, introduced a proviso to Rule 12 of the Share Capital Rules, allowing Department of Promotion of Industry and Internal Trade (“DPIIT”) recognized start-ups to issue ESOPs to promoters for up to 5 (five) years from incorporation. This period was later extended to 10 (ten) years through an amendment notified in 2019. This exemption was carved out recognizing the unique needs of start-ups to retain founding talent.
SEBI (Share based Employee Benefits and Sweat Equity) Regulations, 2021 (“SBEB Regulations”)
For listed entities, the SBEB Regulations regulate ESOPs and other share-based benefits. Here too, the definition of “employee” excludes promoters and the promoter group. As a result, founders who are reclassified as promoters cannot receive fresh ESOPs once their company lists on stock exchange(s).
The interplay of these frameworks previously created uncertainty. While a founder may have validly received ESOPs in earlier years (before being recognized as a promoter), there was no clear regulatory guidance on whether those ESOPs could still be exercised once the founder became a promoter during the IPO process. This uncertainty created challenges both for founders, who were unsure whether pre-existing ESOPs could be exercised at IPO, and for companies attempting to structure incentive plans for leadership likely to be classified as promoters.
With the amendment approved in the SEBI Board Meeting and notified on September 8, 2025, SEBI has formally clarified that pre-existing ESOPs, stock appreciation rights (“SARs”), or other benefits granted at least 1 (one) year prior to the filing of the draft offer documents remain exercisable by founders even after reclassification as promoters.
The SEBI has inserted Regulation 9A in the SBEB Regulations:
9A. Employee identified as promoter or part of the promoter group in the draft offer document.
“An employee who is identified as a 'promoter' or part of the 'promoter group' in the draft offer document filed by a company with the Board in relation to an initial public offering, and who was granted options, SAR or any other benefit under any scheme at least one year prior to filing of the draft offer document, shall be eligible to continue to hold and/or exercise such options, SAR or any other benefit, in accordance with its terms and subject to compliance with these regulations and other applicable laws.”
The clarification addresses the holding or exercise of ESOPs, SARs, or similar benefits by an employee who is later identified as a promoter or part of the promoter group in the DRHP, subject to these conditions:
(a) The options, SARS, or benefits were granted before the employee was identified as a promoter or part of the promoter group.
(b) The grant took place at least 1 (one) year prior to the filing of the draft offer document with SEBI.
Cooling-off period rationale:
The one-year requirement serves as a deliberate safeguard:
(a) Ensures ESOPs are genuinely linked to long-term incentives rather than short-term listing gains.
(b) Prevents founders from benefiting from ESOP issuances shortly before listing.
(c) Protects investors and maintains confidence in the fairness of the capital structure.
In fact, in the Paytm case, founder Vijay Shekhar Sharma transferred shares to a family trust shortly before the 2021 IPO and was classified as a non-promoter in the DRHP, thereby securing ESOPs that would have been impermissible. SEBI later alleged a violation of the SBEB Regulations. In a settlement concluded in May 2025, Sharma surrendered 21 million ESOPs worth over INR 1,800 Crore (Indian Rupees One Thousand Eight Hundred Crore only) and accepted a three-year ban on receiving fresh ESOPs from any listed company. The case underscores the importance of safeguards like the SEBI-approved one-year cooling-off period.
With Regulation 9A of the SBEB Regulations having come into effect on September 8, 2025, founders and startups now have much-needed clarity on ESOP retention post promoter reclassification. The one-year DRHP-based cooling-off period ensures investor protection while preserving legitimate long-term incentives for management. This balanced reform fosters trust and transparency in India’s capital markets as more companies pursue IPOs.
About the authors: Ragini Singh is a Partner and Adith Thottingal is an Associate at ThinkLaw Advocates.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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