The Securities and Exchange Board of India (SEBI) has proposed changes to Employee Stock Option Plans (ESOPs) to help founders of IPO-bound companies continue benefiting from their stock options, even if they are classified as promoters before listing.
In a consultation paper released on March 20, SEBI suggested that employees who later become promoters should still be allowed to hold and exercise their ESOPs, provided these options were granted at least one year before the company decides to launch its Initial Public Offering (IPO).
Promoters and group of promoters cannot accept ESOPs as per present rules of SEBI (Share Based Employee Benefits and Sweat Equity). When a company is poised to offer initial public offer (IPO), some of the co-founders can become promoters on the basis of their shareholding that involves vested ESOPs. The present rules do not make it clear if such employee-promoters can exercise ESOPs or not, creating uncertainty.
For this reason, SEBI has recommended introducing an explanation to Regulation 9(6) of SBEB Regulations, 2023. The provision would allow such founders to exercise and hold their ESOPs if options were granted at least twelve months before the company formally decided to go public.
SEBI believes that such a transition is needed to give employees who were granted ESOPs as part of their remuneration a level playing field. In the meantime, the regulator has suggested a cooling-off period of one year to prevent companies from granting ESOPs while filing their Draft Red Herring Prospectus (DRHP), something that can be used to their benefit.
This rulemaking would strike a balance between protecting employee rights and preventing ESOPs from being used to exploit employees leading up to an IPO.
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Source: Moneycontrol.
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