On September 08, 2025, the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“SBEB Regulations”) were amended and a new Regulation 9A was inserted (“Amendment”).
The Amendment now permits an employee classified as a ‘promoter’ or part of the ‘promoter group’ in a company’s draft initial public offering (“IPO”) document to retain and exercise stock options (“ESOPs”), share appreciation rights (“SARs”), or similar benefits that were granted to them at least one year prior to the filing of the IPO documents.
The genesis for this Amendment, may be seen in a consultation paper released on March 20, 2025 titled “Consultation Paper on certain Amendments to ICDR Regulations and SBEB Regulations with the objective of streamlining certain processes related to requirements of a public issue” (“Consultation Paper”). In the Consultation Paper, SEBI identified a key problem, wherein many new age tech companies, with each successful round of investments raised, the founders’ shareholding in the company gets diluted. To keep founder’s motivated without straining the company’s cash flow through higher salaries, investors and management often grant ESOPs or other equity-linked incentives to founders. These not only help founders retain a meaningful stake but also align their interests with other shareholders. However, under the SBEB Regulations and applicable provisions of the Companies Act, 2013 and rules framed thereunder, ‘promoters’ and members of the ‘promoter group’ are not considered ‘employees’ and are therefore ineligible to receive ESOPs.
Further, the existing regulatory framework as prescribed under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 states that a person can be classified as a promoter in case they exercise control over the affairs of the issuer, directly or indirectly whether as a shareholder, director or otherwise. Thus, there may result scenarios where founders of a company may have to be classified as ‘promoters’ at the time of filing of the Draft Red Herring Prospectus (“DRHP”), due to their holding including options which are vested/ granted. Accordingly, if founders are classified as ‘promoters’ at the time of filing of the DRHP, existing provisions did not provide clarity on whether such persons could exercise the ESOPs granted to them.
Thus, a need was felt to amend the SBEB Regulations, to reflect this understanding. In furtherance of the same, the Amendment now states that share based benefits granted to founders would continue upon such founders being classified as ‘promoters’ in the DRHP. We welcome this Amendment, as it acknowledges the commercial realities of today’s market and ensures that founders remain duly compensated while being incentivized to drive the company’s long-term growth.
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