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SEBI's June 2025 Amendments to ESOP Regulations
SEBI's June 2025 Amendments to ESOP Regulations

June 23, 2025

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In the 210th meeting of the SEBI Board held on 18th June 2025, the Securities and Exchange Board of India (SEBI) has approved amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 and the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. The changes aim to enhance ease of doing business, facilitate public issues, and provide greater flexibility for startups and their investors. The key measures and their expected impact are outlined below:

1. Exemption from Minimum Holding Period for CCS in OFS

Provision: Under existing regulations, only equity shares acquired under an approved scheme were exempt from the one-year minimum holding period required to be eligible for sale through the Offer for Sale (OFS) route in an IPO.

Amendment: SEBI has extended this exemption to equity shares arising from the conversion of fully paid-up Compulsorily Convertible Securities (CCS) received pursuant to such approved schemes.

Impact: This change enables certain investors to participate in OFS during public issues. It is aimed to assist companies undergoing reverse flipping (shifting their domicile from jurisdictions back to India), as it facilitates share liquidation post-IPO.

2. Eligibility of Relevant Persons to Contribute to Minimum Promoter Contribution (MPC)

Provision: While promoters could contribute equity shares arising from conversion of CCS toward fulfilling MPC requirements, relevant non-promoter persons were not permitted to do so.

Amendment: SEBI now permits relevant persons—including Alternative Investment Funds (AIFs), Foreign Venture Capital Investors, Scheduled Commercial Banks, Public Financial Institutions, Insurance Companies registered with IRDAI, non-individual public shareholders with ≥5% post-issue capital, and promoter group entities other than the promoter—to contribute equity shares arising from CCS conversion toward the MPC.

Impact: This amendment broadens the scope of entities that can fulfil MPC obligations, easing structuring constraints for startups backed by institutional investors.

3. Relaxation on ESOP/Share-Based Benefits for Promoters

Provision: Promoters were previously not permitted to hold or be granted share-based benefits, including ESOPs. If any such benefits were held at the time of filing the Draft Red Herring Prospectus (DRHP), they were required to be liquidated.

Amendment: Founders or promoters will now be allowed to continue holding and/or exercising share-based benefits, provided such benefits were granted at least one year prior to filing the DRHP with SEBI.

Impact: This amendment addresses a major industry concern from startup founders classified as promoters, enabling them to retain ESOPs or similar benefits post-listing. It aligns with international practices and strengthens long-term retention incentives.

Facilitating Co-Investment within AIFs

Provision: Under the existing framework, co-investment by investors alongside Category I and II Alternative Investment Funds (AIFs) was primarily facilitated through the Portfolio Management Services (PMS) route. This created operational challenges, such as dual registration requirements for Investment Managers and difficulties for unlisted companies dealing with multiple shareholders.

Amendment: SEBI has approved amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 to permit Category I and II AIFs to offer a Co-Investment Scheme (CIV Scheme) within the AIF structure itself. The key features of the approved co-investment framework include:

  • CIV Scheme Definition: A distinct scheme under a Category I or II AIF that facilitates co-investment by accredited investors in unlisted securities of investee companies where the primary AIF scheme is also investing.
  • Scheme Structure: A separate CIV Scheme will be launched for each co-investment, subject to safeguards ensuring bona fide use.
  • Regulatory Flexibility: Certain regulatory requirements applicable to general AIF schemes will be relaxed for CIV schemes.

Impact:

  • Enhances ease of doing business for AIFs by removing the need for PMS registration to facilitate co-investment.

 

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