IPO Norms Eased: SEBI's Startup Reforms Signal New Era

[Ishan and Pratyush are students at Gujarat National Law University.]

In a trailblazing move to position India as a top startup hub of innovation, the Securities and Exchange Board of India (SEBI) vide board meeting dated 18 June 2025, launched sweeping reforms set to significantly change the manner in which startups interact with public markets. The reforms cover a wide spectrum of initiatives—ranging from streamlining the rules relating to Employee Stock Option Plans (ESOPs) for founders to enabling reverse-flipping for Indian startups overseas, enabling more meaningful co-investment through alternative investment funds (AIFs) and streamlining foreign portfolio investors (FPIs) compliance in the Government Securities market. The reforms are aimed not only at streamlining compliance obligations but also at deliberately focusing on domestic capital growth, founder retention, and contribution by global investors.

Analysis

At the core of the reforms is the much-awaited rationalization of ESOP regulations. Traditionally, startup founders who were part of the promoter category were required to relinquish their ESOPs upon public issue of their companies—a stipulation that broke the alignment of founders' long-term interests with their own interests. The latest modifications by SEBI allows promoters to hold and exercise ESOPs after an initial public offering (IPO), subject to the condition that these options had been granted at least a year before the filing of the draft red herring prospectus (DRHP). This revision addresses a structural imbalance and is expected to materially improve founder retention, especially at the pivotal stage of scaling after listing. This reform is especially significant considering that Indian founders have earlier exited their firms prematurely due to unfavorable equity terms. A well-known example is that of Zomato, where various founding members exited shortly after the IPO, which took investors by surprise. Had there been such flexibility for ESOPs then, it could have helped retain key leaders at a decisive juncture.

This shift will also accrue to incumbent IPO-ready firms like Ola Electric. The electric mobility firm, which is working on its listing strategy, has a founder-led leadership structure and is extremely dependent on equity incentives for its leadership team. With ESOP flexibility, Ola Electric is able to now elicit longer-term commitment from critical talent, lowering churn and communicating transparently to public investors about leadership stability. On top of that, the policy fosters a startup ecosystem where entrepreneurial risk and reward are still tied beyond the horizon of a private venture capital cycle, one that has been a worry for Indian founders.

No less noteworthy is the initiative taken by SEBI to ease the process of "reverse-flipping," i.e., redomiciling startups back to India from places like Singapore or Delaware. A number of startups that were incorporated in India have shifted their headquarters to foreign jurisdictions in pursuit of global capital, tax benefits, or eased exits. With Indian capital markets evolving to become more sophisticated and large, the earlier justification for such a shift has lost steam. SEBI, in response to this new environment, has allowed the issue of compulsorily convertible securities (CCS) under the Offer for Sale (OFS) and also included converted CCS shares in the minimum promoter contribution for an initial public offering (IPO). This regulatory change removes a major hurdle for startups like Razorpay, Pine Labs, and Meesho—companies that are largely India-based but outside-India incorporated. As a result, these organizations now have a regulatory environment that allows them to reverse-flip back to India, access local sources of capital, and offer Indian investors the opportunity to take part in their wealth creation.

The Flipkart case is a notable warning example. Initially basking in the glory of being an Indian unicorn, Walmart's acquisition of Flipkart and its foreign positioning meant that the dominance of wealth creation from its success accrued to global shareholders instead of Indian retail or institutional investors. SEBI's reforms seek to prevent similar situations in the future by increasing the attractiveness of Indian exchanges to founders and investors as well. In addition, these changes align with overall economic goals like Atmanirbhar Bharat and Digital India, thus establishing India as not just an origin source but also a source of innovation, value retention, and market expansion..

These reforms also counteract the traditional dominance of foreign investment in Indian innovation. By enabling domestic family offices and angel investors to play larger and more organized roles, SEBI is creating a responsible and responsive local capital base. This, in turn, could over time diminish India's need to borrow from Silicon Valley or Southeast Asia to fund startups, keeping profits from Indian innovation within the Indian economic system.

Moreover, SEBI has eased the compliance regime for FPIs investing solely in government securities. Their Know Your Customer guidelines will be in line with those of the RBI, facilitating easy entry for foreign bond investors into India's sovereign debt markets. Though this change does not directly relate to startups, it enhances the overall financial well-being of India as a whole by infusing liquidity, reducing the cost of borrowing, and serving as a model of regulatory maturity. This, in its turn, facilitates the raising of structured debt or pre-IPO funding for startups, providing them with options for capital other than pure equity.

In the coming years, the long-term impact of SEBI's 2025 reform agenda will be profound—not just as a cascade of empowering regulatory reforms, but as a fundamental transformation in the interconnectedness of India's startup and capital market ecosystems. Perhaps the most significant transformation is easing ESOP restrictions on founder-promoters. India's past listing regime discouraged founders from holding onto ESOPs, which too often led to premature exits or a mismatch between toil and reward. By allowing retention of ESOPs awarded at least one year before the filing of the DRHP following an IPO, SEBI has recast a vision of long-term ownership and continuity. It is not to be underestimated. It reverses the power dynamics of involvement of founders with public shareholders, promotes accountability after a company's listing, and can have the potential to temper the boom-bust cycles witnessed with companies like Paytm, whose whiplash market adjustments followed initially lofty pre-IPO valuations.

Secondly, SEBI's reverse-flipping reforms—specifically, the relaxation given on CCS in IPO eligibility—will cause global Indian startups such as Zepto and Groww to re-domicile. This repatriation of high-growth companies will have a cascading impact: better data sovereignty, better domestic capital access, and higher institutional confidence in domestic markets. Additionally, such reforms will keep high-quality unicorns from leaving to NASDAQ or Singapore Exchange listings, and Indian investors and regulators will not be denied the next wave of wealth-creating businesses.

Third, formalizing AIF and angel investor structures through mobility of co-investments and accredited investor status will trigger a more professional and diversified early-stage capital environment. By facilitating family offices, HNIs, and angels to co-invest with institutional AIFs, SEBI is releasing a new model of "blended capital," in which strategic acumen is combined with entrepreneurial nimbleness. This can potentially eliminate the notorious "Series A cliff" that compels high-potential startups to close shop or radically change direction because of delays in funding.

Conclusion

However, beyond the legal and economic layers, a deeper, more structural transformation is unfolding—India’s potential shift from a valuation-driven to a value-creation-driven public market culture. Indian IPOs have been all about pricing perfection and short-term listing pops, and never quite enough about long-term corporate stories. SEBI's reform package runs counter to this culture, where the regulator is nudging the stakeholders towards longer investment horizons, strategic patience, and outcome-based measures. In this new world, success is not measured by day-one price surges, but by post-IPO execution, stakeholder retention, and public wealth creation over the longer term.

Of course, the path forward is not without its challenges. ESOP taxation is still a contentious issue; unless resolved by the Ministry of Finance, the advantage of retention can be undermined by penal tax costs at exercise or sale. Reverse-flipping, while enabled by SEBI, will need systematic effort by the RBI and the Department for Promotion of Industry and Internal Trade to eliminate FEMA and outbound investment resistance. Co-investment, while accommodating, also has governance risks if effective conflict-management processes are not integrated into fund architectures. 

However, the broad direction of SEBI's reforms is unmistakable: a courageous move away from regulation-as-restraint towards regulation-as-catalyst. India's capital markets are being re-wired to facilitate innovation—not merely technologically, but structurally. Founders have regulatory room to scale up post-listing; retail and institutional investors can invest in high-quality startups; and the economy benefits from tighter integration of capital formation with enterprise development and growth. If accompanied by inter-institutional coordination and market discipline, SEBI's reforms can make India not merely the world's startup factory—but its most vibrant, inclusive, and innovation-driven public market ecosystem.

This is not a policy revision; it is a cultural re-engineering of how India constructs, invests, and organizes its future champions.