SEBI eases IPO norms for startups with ESOP, reverse-flipping reforms

The Securities and Exchange Board of India (SEBI) has relaxed public listing regulations for startups by approving positive changes related to employee stock options (ESOPs) held by founders and the reverse-flipping back to India. 

 One major change is how ESOPs are treated during the IPO process. Earlier, if a founder was listed as a promoter, they were not allowed to keep or use ESOPs after the company filed for an IPO. They had to give up these benefits before going public. But under the new rule, if a founder gets ESOPs at least one year before the company files its Draft Red Herring Prospectus (DRHP), they can keep and use them even after the company is listed. This change gives founders more flexibility and keeps them motivated through the IPO process.

SEBI has also simplified the process for startups shifting their company structure from overseas to India, a move known as reverse-flipping. Earlier, investors holding shares that came from the conversion of certain securities (called Compulsorily Convertible Securities or CCS) were not allowed to take part in the company’s Offer for Sale (OFS). Under the new rule, SEBI now permits such shares to be included, making it easier for these companies to raise funds through public markets.

The regulator has relaxed rules around who can contribute to the minimum promoter shareholding required at the time of an IPO. Earlier, only promoters could offer converted CCS for this purpose. Now, other key investors like venture capital funds, banks, and large shareholders can also cover their CCS to take part in meeting the minimum promoter shareholding.

These changes are part of SEBI’s larger push to make it easier for companies to go public. The regulator has also made it mandatory for certain shareholders, like promoters, employees, and key managers, to convert their shares to electronic (demat) form before filing IPO papers, to improve transparency and reduce fraud.

The move comes even as earlier rules that allowed many startups with weak financials to list in India drew criticism, forcing the regulator to relook its norms. It tightened those to ask for more disclosure around conflict of interest among promoters and key investors, directors, third party service providers, etc, among other moves. The latest moves also make it easier to delist PSUs with over 90% government stake. The moves will certainly help the startup ecosystem to deliver for stakeholders, as the experience in Indian IPOs has been far better than on foreign shores. Deepening the ownership pool with public ownership comes with its own responsibilities that have also helped these firms do better on governance and compliance. Startups like Razorpay, Meesho, Groww, and Pine Labs,among others, will benefit, with many others waiting in the wings. Some estimates have placed almost $10 billion of fundraising plans in place via the IPO route in India from startups this financial year.