'Much-needed relief': Startups on Sebi reforms relaxing ESOP norms

Business Standard

19-06-2025

The ease in norms from the Securities and Exchange Board of India (Sebi) comes at a time when multiple Indian startups such as PhonePe, Zepto, Pine Labs
Udisha Srivastav Peerzada Abrar Ajinkya Kawale New Delhi/Bengaluru/Mumbai
Startups are hailing SEBI's latest reforms as a much-needed relief, calling them a timely move that removes key hurdles in the IPO journey. The easing of stock holding norms for founders and simplification of rules for existing investors to participate in offer-for-sale (OFS) components are expected to boost listing plans for new-age companies.
The ease in norms from the Securities and Exchange Board of India (Sebi) comes at a time when multiple Indian startups such as PhonePe, Zepto, Pine Labs, among others are targeting to go public soon. Over 30 startups, with a cumulative value of $100 billion may go public in the next two years, a report by The Rainmaker Group shows.
Harshil Mathur, CEO and co-founder of fintech giant Razorpay, said 'SEBI's move marks a defining moment for India's startup ecosystem. By empowering founders to stay invested and easing the road back home, this step fuels a future where the best Indian companies are built, scaled, and celebrated right here. It's not just a policy tweak, it's a signal that India is ready to be the world's innovation hub,' said Mathur.
The markets regulator's proposal allows founders to retain share-based benefits such as employee stock ownership plan (ESOP) at the time of filing their draft red herring prospectus (DRHP), on the condition that these benefits are granted one year prior to filing the document.
"This move brings more flexibility and fairness to how founders stay invested. It also reduces the friction for good companies to go public," said Vikram Chopra, founder and chief executive officer (CEO) of auto-tech platform CARS24.
'It's also a change many in the ecosystem, including us at CARS24 have been requesting for a while. The capital markets benefit when the people building businesses remain motivated to stay the course. This is a step in the right direction,' said Chopra.
Bankers explained that the market regulator usually insists on categorising founders as promoters as they have a controlling say in the management.
Earlier, traditional promoters and founders of startups, were barred from holding share-based benefits since there was no distinction between the two. However, startup cap-tables go through rounds of dilution during fundraise with founders dependent on ESOPs.
Startup founders explained that the new norms may enable healthier exits for early teams and founders.
"SEBI's ESOP reforms are a much-needed recognition of the long-term skin in the game that founders bring to the table. By allowing founders to retain ESOPs granted before the IPO, the move removes a structural bias that discouraged listings and limited wealth creation," said Abhiroop Medhekar, co-founder and CEO, of Velocity, an e-commerce enablement platform.
'This positive reform comes as a big relief to founders of new-age companies as it will enable them to avail skin-in-the-game benefits and align their interests with other shareholders,' said industry body Startup Policy Forum (SPF)
It streamlines how accredited investors, already participants in AIFs, can co-invest in high-conviction opportunities alongside fund managers, aligns India with global norms, and removes longstanding friction around such structures.
"This will further increase the flow of private, especially domestic capital, to entrepreneurial and growth businesses. By limiting CIVs to accredited investors, SEBI has also signaled a shift toward more principle-based, lighter-touch regulation for qualified participants," said Gopal Srinivasan, Chairman and Managing Director of TVS Capital Funds and Senior Board Member, Indian Venture and Alternate Capital Association (IVCA).
Executives added that the move will enable investors to participate in funds with ease.
"We often have sophisticated investors who want the option of co-investing but struggle for lack of appropriate structures to do so; especially global institutional investors and family offices. With this change, within the same scheme one is able to offer co-investments to such investors and therefore makes the proposition far more attractive and tenable. This will certainly help us bring on some marquee investors into the fund," Abhishek Prasad, managing partner at Cornerstone Ventures said.