SEBI’s Founders-First ESOP Reform: A Policy Shift or Slippery Slope?

[Adwitiya and Suprava are students at Gujarat National Law University.]

On 18 June 2025, the Securities and Exchange Board of India (SEBI) approved amendment providing regulatory relief for founders holding ESOPs of a company who later get named as ‘promoters’ when the company goes for an initial public offering (IPO). Usually, when the company is established, a founder is required to perform several roles to promote the growth of the company. With meagre resources entrusted with the company in such initial times, the founders are not able to avail the benefit of their hard work in such stage. Here, employee stock option plans (ESOPs) play a crucial role as it promise employees of the company that if the company grows, they will be able to reap the benefits of the growth of the company. So, employees settle for lower salaries as compared to traditional salaries when provided the ESOPs. Usually, the founders also rely on such ESOP grants. 

However, as the company grows and decides to go public, it becomes a tricky position for the founders of the company as they usually get classified as the promoters of the company during an IPO. The Companies (Share Capital and Debentures) Rules 2014 (Companies Rules 2014) and SEBI (Share Based Employee Benefits and Sweat Equity) Regulations 2021 (SBEB Regulations) do not permit the promoters of a listed company to hold ESOPs. Therefore, crucial question arises, what happens to the ESOPs granted to founders of the company before they were classified as ‘promoters’ and the company had not gone for listing. Until now, there was no provision that provided clarity on whether the founder would have to give up the ESOPs, or if they would lose the benefit of the ESOPs. Consequently, SEBI came up with the relief providing that now founders can be allowed to retain the benefits of the ESOPs given the ESOP has been granted before the founder is identified as a ‘promoter’ and the ESOPs are granted at least one year before the board decides to go public.

This blog analyses the provision and points out the possible effects of the amendment. 

Decoding the Change

In the consultation paper dated 20 March 2025, SEBI proposed to insert Explanation 2 under Regulation 9(6) of the SBEB Regulations to clarify its applicability and to state the following:

“Explanation 2: An  employee, identified  as  a “promoter”  or  “promoter  group”  in the draft offer document filed by a company in relation to an initial public offering, who was granted  options, SARs or other benefits  under  any  scheme prior to being identified as a “promoter” or “promoter group”, as the case may be, shall be eligible to continue to hold, exercise or avail any such option, SAR or benefit, in accordance with its terms and granted, prior to one year from the date when the company (i.e. it's board) decides to undertake initial public offering and, in compliance with these Regulations.” 

With the addition of the above explanation, it becomes clear that if a founder fulfils the following two conditions, he/she will be eligible to hold ESOPs even after being named as a promoter when the company goes for listing. 

Condition 1: The ESOPs must be granted before founder is identified as promoter. 

The rationale behind this condition is that as per the existing rules, namely, the Companies Rules 2014 and SBEB Regulations does not permit a promoter of a listed company to hold ESOP. Here, SEBI acknowledges that may a times, the founders are not treated as promoters at first under the Companies Act 2013. However, when the company filed for an IPO, the stock exchanges may classify them as promoters based on their control or shareholding. SEBI attempts to protect the ESOPs that were granted to the founders before being classified as ‘promoter’. Therefore, SEBI here protects the interest of innocent founders and at the same, time protects the provision from being misused by not allowing issuance of new ESOPs to founders after being classified as ‘promoter’. 

Condition 2: The ESOPs must be granted at least one year before the board decides to go for an IPO. 

This condition acts as a safeguard for the misuse of ESOP grants to founders, right before a company goes for an IPO. The requirement to grant ESOPs at least one year prior to an IPO is intended to prevent companies from hastily issuing stock options to promoters right before going public to provide them with an unfair edge. This one-year gap serves as a buffer period to ensure that the ESOPs were awarded as a legitimate form of employee compensation, rather than being tied to the impending IPO.

Grant of both Employee Benefits and Control to ‘Promoter’: A Double Benefit Crisis?

As the companies' post listing allows the founder named as ‘promoter’ to retain the ESOPs, i.e., an instrument with the objective of providing employees incentive to work for the company without granting them control over the company, it leads to a question - whether the founder is being given all the benefits without giving them equivalent liabilities? To examine potential problems that might arise in a situation where the same person is given both employee benefits and control over the company, the following case studies are elucidated. 

Paytm and Vijay Shekhar Sharma controversy

The controversy roots from the grant of 21 million ESOP units to Paytm’s Founder and CEO, Vijay Shekhar Sharma, and an additional allocation to his brother, Ajay Shekhar Sharma, ahead of Paytm’s IPO in 2021. Prior to the IPO, Mr. Sharma reduced his direct stake from 14.7% to 9.1% by transferring it to a family trust in order to be reclassified as a ‘non-promoter’ on paper. Owing to his influential position in the company he held control through direct and indirect holdings. Later, SEBI alleged violation of share-based benefit regulations and misrepresentation in IPO disclosures. The regulator concluded the ESOP grants to both brothers were unlawful due to their continued control and influence. This raises concerns over the independence of the nomination and remuneration committee (NRC) during the approval of such ESOP grants.

Religare Enterprises controversy

In 2024, Religare Enterprises drew attention for granting ESOPs worth over INR 200 crore to its executive chairperson, Dr Rashmi Saluja. The case demanded extreme scrutiny due to the timing, structure, and size of the grant, especially due to the fact that she already held significant influence over the company’s board and strategic decisions. A question arose here whether the grant was genuinely linked to performance or was merely a method to unjustly enrich an insider who is already in control. The enforcement directorate opened a formal investigation into this. Reports suggested that the ESOPs were deeply discounted and did not undergo sufficient scrutiny by the NRC, raising concerns about the committee's independence. The case raises pressing concerns about the independence of the NRC, especially when promoters or quasi-promoters can influence their own compensation structures. Also, it reinforced the need for internal controls and shareholder scrutiny in ESOP approvals when control and incentive intersect. 

Analysis: The Governance Risks Behind Promoter ESOP Retention

While SEBI’s move may initially appear to be a good decision that tries to acknowledge the efforts of founders by allowing them to retain the benefits of the early-stage ESOPs. It also raises governance concerns upon a deeper look. Once founders get converted to promoters at the time of listing, they often gain substantial influence over strategic and board-level decisions, including the workings of the NRC. This creates a new ground for undue influence over ESOP-related approvals, especially in closely held or promoter-dominated boards, as seen in the Paytm Case. 

Moreover, the main purpose of ESOPs is to serve as incentives for employees, which is tied to performance. This gets blurred when the controlling promoters are the beneficiaries. This results in a misalignment of interests between promoters and public shareholders who face equity dilution without receiving proportional governance rights or returns. This double-dipping scenario is where promoters enjoy both strategic control and financial benefit without any oversight. Such scenarios can weaken corporate governance by setting up a precedent where control is rewarded without accountability. This can ultimately lead to undermining trust in the long-term integrity of capital markets. 

Conclusion

The amendment recognizes the contributions of founders and aims to make it easier for startups to go public. However, it does not fully address the governance risks that arise when control and financial benefits overlap. As seen through the Paytm and Religare cases, granting or retaining ESOPs in favour of individuals with significant control risks undermining board independence, distorting incentive structures, and opening the door to unfair financial gains. To ensure that such reforms do not become the rules of promoter-driven privileges, certain safeguards must be institutionalized. 

These include the introduction of quantitative thresholds on promoter-held ESOPs, mandatory performance-linked vesting criteria, and the constitution of a truly independent NRC which is free from promoter influence. Such measures will ensure that ESOPs remain a legitimate tool for incentivizing value creation and not a vehicle for unchecked financial gain. While SEBI has closed a legal loophole, the onus may now lie on policymakers and boards to ensure the spirit of equitable governance is not lost in the pursuit of founder friendliness.