The Securities and Exchange Board of India (SEBI) has decided to ease the norms on employee stock ownership plans (ESOPs) for startup founders allowing them to hold share-based benefits even after listing, under certain conditions.
The capital markets regulator has proposed to allow startup founders classified as promoters to retain their ESOPs options, granted as a part of compensation, if they have received them at least one year prior to the filing of draft red herring prospectus (DRHP), it said in a statement after a board meeting.
The current set of rules require founders, who are classified as promoters before filing for an initial public offering (IPO), to liquidate their share-based benefits before they list on stock exchanges. SEBI norms bars promoters from holding ESOPs to ensure there’s no preferential treatment once a company goes public, but the classification particularly impacted startup founders, who often receive ESOPs as part of their compensation or incentive structure before the company contemplates an IPO.
The decision is meant to incentivise IPO options for startup founders and ease its preparation, especially those startups shifting their headquarters to India via reverse flipping, SEBI said. It follows a public consultation in March 2025, a review by the Primary Markets Advisory Committee, and incorporation of stakeholder feedback.
Angel funds
Further, the market regulator also approved proposals to rationalise the regulatory framework to govern angel funds under the existing Alternative Investment Fund (AIF) framework.
Under the new rules, SEBI requires all angel investors in angel funds to be accredited investors. This requires independent verification of investor status, with thresholds that reflect current market levels, instead of financial criteria defined in 2013, SEBI said.
Under the current setup, only angel Investors that meet certain conditions can invest in angel funds. However, there is no verification (other than by the fund manager) on the eligibility of investors, without verifying their risk appetite. The new rules, which require a more rigorous process for verification, are a move towards standardizing investor eligibility.
Accredited investors will be treated as qualified institutional buyers (QIBs) for investing in angel funds, expanding the eligible investor base while also complying with Companies Act limits. Further, SEBI has relaxed the investment band from between Rs 25 lakh and Rs 10 crore to between Rs 10 lakh and Rs 25 crore. It has also removed the limit on the number of accredited investors permitted in an investment. This allows more such investors to participate in a single investment, the size of which has also increased, and will allow angel funds to grow their investor base.
In addition, SEBI removed the concentration limit of 25% of angel funds exposure to a single company. Angel funds can now put in more capital in a single company. However, fund sponsors or managers must invest at least 0.5% or Rs 50,000, whichever is higher, in every deal.
Overall, the set of changes will permit larger fundraises and more efficient syndication, with a standard process for determining eligibility, SEBI said.
