SEBI's Reforms: Unlocking Capital Markets & Empowering Founders
- Madhur Joshi
- Jun 24
- 4 min read
The Securities and Exchange Board of India (“SEBI”) in its 210th Board Meeting has approved a set of crucial amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”) and the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“SBEB Regulations”). These reforms are designed to streamline various processes and provide essential clarifications to enhance the ease of doing business within the Indian capital markets.
The core objective behind these approvals, stemming from a public consultation paper on March 20, 2025[1] and subsequent deliberations, is to provide much-needed clarity and flexibility for companies planning to go public.
Previous Regulatory Roadblocks
Before these amendments, the existing regulatory landscape presented several hurdles, notably impacting founder incentivisation and capital raising mechanisms:
a) ESOPs for Founders: A notable area of concern stemmed from the provisions concerning Employee Stock Ownership Plan (“ESOP”) for founders. Under the previous regulatory framework, the definition of ‘employee’ under Regulation 2(1)(i) of the SBEB Regulations excluded promoters and members of the promoter group. Similarly, a promoter is not included within the ambit of the term ‘employee’ under Section 62(1)(b) of the Companies Act, 2013 (“Act”) and Rule 12 of the Companies (Share Capital and Debenture) Rules, 2014.
Further, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”) inter alia defines a promoter to be a person who, whether as a shareholder, director or otherwise, has control over the affairs of a company. As a result, founders who had been granted ESOPs during the formative years of the company are classified as promoters at the time of filing the Draft Red Herring Prospectus (“DRHP”), and were required to liquidate their ESOP holdings before the Initial Public Offering (“IPO”). These provisions were undermining the long-term incentives and wealth creation of founders classified as promoters.
b) Converted Securities in offer for Sale: Previously, Regulation 8(b) of the ICDR Regulations provided an exemption from the minimum holding period for equity shares. This exemption applied to equity shares acquired through an approved scheme under Sections 230 to 234 of the Act, allowing them to be eligible for an offer for sale in a public issue.
However, this exemption did not extend to equity shares that resulted from the conversion of fully paid-up Compulsorily Convertible Securities (“CCS”) received under such approved schemes. This restriction directly impacted the ability of CCS investors to participate in the offer for sale of a public issue.
Reforms approved in the SEBI board meeting
The recent approvals by the SEBI directly address these identified challenges, aiming to provide greater flexibility and clarity:
a) Clarification on Founder ESOPs: The SEBI has approved a proposal that will facilitate founders to continue holding, and / or exercising share-based benefits, such as ESOPs, issued at least one year before the filing of the DRHP with SEBI, even after they are classified as promoter(s) and after the company becomes a listed entity. This relaxation is specifically designed to address the impact on founders who are classified as promoters at the time of DRHP filing.
b) Exemption for converted equity shares in offer for sale: SEBI has extended the exemption under Regulation 8(b) of the ICDR Regulations to cover equity shares arising from the conversion of fully paid-up CCS, provided these were issued under a scheme approved under Sections 230 to 234 of the Act. This relaxation removes the one-year minimum holding requirement and is aimed at facilitating greater participation in offer-for-sale transactions and supporting companies exploring reverse flipping to India.
Additionally, SEBI allowed certain ‘relevant persons’ to contribute their equity shares (converted from fully paid-up CCS) to meet the minimum promoter contribution (MPC) requirement. Earlier, only promoters could contribute such equity shares to the MPC requirement.
Additional reforms:
SEBI approved a bundle of additional reforms aimed at enhancing market efficiency and transparency. Key among these is:
a) Mandatory full dematerialisation of securities: This applies to a broader set of shareholders, promoting a paperless and transparent environment.
b) Special measures for the voluntary delisting of Public Sector Undertakings (PSUs): These measures streamline their exit from the public markets, especially for those where government holds a significant majority stake.
c) Co-investment opportunities for Category I & II Alternative Investment Funds (AIFs): This fosters greater flexibility and capital formation in the AIF sector. (For detailed insights, check this Article.)
Impact and a way forward
SEBI's latest approvals mark a dedication to modernising the regulatory landscape, fostering a more flexible, transparent, and efficient environment for companies seeking to access public capital. By relaxing certain requirements prior to the IPO, the move aims to retain incentives for key individuals driving company growth. The amendments are also expected to assist companies that are intending to list after undertaking reverse flipping, providing a more conducive environment for such transitions.
These proposals, having gone through a comprehensive public consultation process and extensive deliberation, are anticipated to contribute to India's growth.
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