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SEBI’s Consultation Paper on IPO & ESOP Regulations – Key Updates You Should Know - MMJC
Introduction:
SEBI has released a Consultation Paper proposing changes to the ICDR Regulations, 2018, and the SBEB & SE Regulations, 2021. The objective is to streamline the IPO process, clarify ESOP rules for startup founders, and ensure regulatory consistency. These changes will significantly impact how IPO-bound companies navigate regulatory compliance and corporate governance. Let’s break down the key amendments in a way that makes sense.
1. Selling Shares in an IPO – The Holding Period Rule Update
What’s the Rule Today?
Regulation 8(1) of the ICDR Regulations states that shares offered for sale in an IPO must be held for at least one year before filing the Draft Red Herring Prospectus (DRHP). However, shares acquired through a merger or restructuring approved under Sections 230-234 of the Companies Act, 2013, are exempt from this rule.
Clarifying the Ambiguity
While the exemption under Regulation 8 of ICDR applies to equity shares, it doesn’t explicitly cover compulsorily convertible securities (CCS). This creates uncertainty that if someone receives CCS via an approved scheme and later converts them into equity shares, does the one-year holding requirement still apply before selling them in an IPO?
Additionally, there is an inconsistency between Regulation 8 (OFS) and Regulation 15 (MPC) of the ICDR Regulations. Regulation 15 already allows shares arising from CCS under an approved scheme to count toward MPC, but Regulation 8 does not extend the same treatment for OFS eligibility. This inconsistency affects how IPO-bound companies structure their shareholding and plan their offer for sale.
What’s SEBI Proposing?
SEBI wants to make it clear that these shares that are convertible into equity shares should also be exempt from the one-year holding rule. The proposal is to amend Regulation 8(1) to explicitly state that equity shares include those arising from CCS conversion under an approved scheme.
To ensure uniformity, SEBI’s proposed amendment also clarifies that shares arising from CCS conversions under approved schemes should be treated equally for both MPC and OFS eligibility. This harmonization will provide greater clarity and reduce compliance burdens for companies preparing for an IPO.
SEBI wants to make it clear that these converted shares should also be exempt from the one-year holding rule. The proposal is to amend Regulation 8(1) to explicitly state that equity shares include those arising from CCS conversion under an approved scheme.
2. ESOPs for Founders – Clarifying Promoter Classification Rules
The Current Situation
Regulation 2(1)(i) of the SBEB & SE Regulations, 2021, prohibits promoters and members of the promoter group from receiving ESOPs. But what happens when a startup founder, who initially received ESOPs as an employee, later gets classified as a promoter before an IPO? Do they lose their ESOPs?
The Regulatory Gap
Startup founders often take ESOPs instead of higher salaries to align their interests with the company’s growth. However, if they later become promoters, the existing rules don’t clarify whether they can still exercise their granted ESOPs.
What’s SEBI Proposing?
Regulation 9(6) of the SBEB Regulations will be updated to state that ESOPs granted to a founder before they were classified as a promoter will remain valid, provided they were granted at least one year before the company’s IPO decision.
Why This Matters
This clarification ensures fair treatment of startup founders and prevents last-minute ESOP grants before an IPO, reducing compliance risks. It also helps in structuring ESOP policies more effectively.
Deadline: April 10, 2025
How to Submit: Visit SEBI’s website or email consultationcfd@sebi.gov.in with the subject “Consultation Paper on IPO Regulations.”
Link to Consultation Paper: