SEBI Board Likely to Discuss ESOP Reforms for Startup Founders and PSU Delisting Norms

The Securities and Exchange Board of India (SEBI) is set to hold a board meeting on June 18, where key regulatory changes related to employee stock options (ESOPs) for startup founders and voluntary delisting of public sector undertakings (PSUs) are likely to be taken up for discussion, according to people familiar with the matter.

According to a report by The Economic Times,One of the major proposals SEBI may consider is allowing startup founders to retain and exercise ESOPs even after their companies go public. Under current rules, once a founder is classified as a promoter during the IPO process, they are no longer eligible to receive or exercise ESOPs.

SEBI believes the current framework lacks clarity on whether a founder-turned-promoter can use their ESOPs, whether vested or not. This has led to confusion and discouraged companies from offering ESOPs to core founders once they list on the stock exchanges.

In early-stage startups, particularly in the tech space, founders are often compensated with stock options rather than salaries to align their long-term interests with those of investors. However, with multiple funding rounds, their equity tends to get diluted.

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Still, the issue remains sensitive. Critics argue that liberal ESOP rules can be misused, leading to dilution of public shareholding or unjust enrichment of insiders.

SEBI is also weighing the introduction of a cooling-off period of one year between the grant of ESOPs and filing for an IPO. The idea is to prevent companies from rushing to reward insiders just before going public, which could raise governance concerns. However, market experts believe this time frame may be too long, especially in fast-moving startup environments.

Another important topic on the agenda is the creation of a special mechanism to allow PSUs to delist voluntarily from stock exchanges if the government holds over 90% stake.

SEBI’s internal assessment found that some PSUs have low public float, poor financial health, or outdated product lines. Even among profitable ones, the long-term prospects may be weak due to a lack of innovation or planned asset sales by the government.

SEBI’s earlier discussion paper noted that since PSU shares are government-backed, investors perceive them as safe, often driving prices above their actual book value.

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