In the recent years, there has been a significant up-tick in the Indian IPO (initial public offering) markets, specifically with more new age/ tech companies going public. After a record breaking 93 mainboard IPOs in 2024, the
phenomenon is only poised to increase further in 2025, with about 90+ DRHPs filed in Q1 & Q2 2025. A strong pipeline of high-profile IPOs is expected in the second half of 2025, including several Indian companies which have shifted their overseas holding companies to India structure (i.e., ‘reverse flip’).
In a move aimed at further easing the IPO process for Indian start-ups, SEBI approved a series of encouraging relaxations in its Board meeting held on 18 June 2025. While the fine print is still awaited, these reforms are expected
to support founders of Indian start-ups aspiring IPO in India and provide flexibility for companies which are pursuing ‘Gharwapse’ / ‘reverse flip’ exercise.
Notable changes approved include relaxation in respect of ESOPs validly granted to founders (when they were not classified as promoters) prior to 1 year before a company files its DRHP, which shall now remain intact even if such founder is classified as ‘promoter’ in it.
The SEBI has also provided that equity shares received on conversion of fully paid
compulsorily convertible preference shares (CCPS), received as part of a court-approved merger scheme, shall be exempt from the minimum one-year holding requirement for sale in OFS (provided the original investment in amalgamating company was held for over a year). This clarification is especially welcoming for financial investors in start-ups, considering that a significant part of their holdings is generally held as CCPS in IPO bound companies. Further, such CCPS received on merger by eligible non-promoter investors can now be contributed towards the 20% minimum promoter contribution as well.
Open challenges: Promoter classification and ESOP restrictions
While current regulations do not prescribe any brightline test for classification of a ‘promoter’, historically the practice has been to consider a person (along with immediate relatives) with 25% or more shareholding / voting rights in a company on a post-listing basis, to be classified as the promoter of such company. However in the recent times, stock exchanges seem to have modified the approach to consider founders who collectively hold more than 10% stake (including vested
options) in a company as promoters, even where such founders are unrelated.
This has resulted in many start-up founders being classified as promoters, even where such founders individually hold an insignificant minority interest with no control. This approach to promoter classification could have several unintended consequences, like inability to meet the minimum 20% promoter lock-in requirement (where founders collectively hold less than 20% of the company). As a result, IPOs may face commercial delays, on account of additional negotiation with other investors to
secure the requisite lock-in. Furthermore, this approach also prevents founders from receiving fresh ESOPs in future, and also mandates the founders to unwind (exercise / cancel) their existing ESOPs (which is now marginally relaxed by SEBI in the recent clarification).
Globally, countries like Germany, Singapore and the US permit stock option grants to founders, subject to clear conditions such as approval from independent shareholders, role-based, ownership based, or compensation-based threshold etc, which aim to balance founder
incentives with shareholder protections, supporting long-term value creation. As a matter of fact, CEOs / top professionals of traditional listed companies in India are granted ESOPs as part of their remuneration as well.
Linking the founder’s success to company’s performance by granting ESOPs or equity-linked incentives to founders (in lieu of cash-based compensation) not only conserves cash for business growth, but also keeps key leaders committed and incentivised for the long haul.
Therefore,
while the current relaxation by SEBI is a welcome move, taking it a step further by addressing the core issue around promoter classification, aggregation of unrelated founders’ stake and a progressive relook of the current ESOP norms (in founders’ context), would further foster a culture of entrepreneurship, innovation and long-term value creation for stakeholders.
Additionally, clarity on whether the current founder ESOP relaxation would also extend to reverse-flip cases (i.e., ESOPs granted by a foreign parent
company prior to a reverse flip) would also be helpful. Clarifications on these aspects would pave the way for stronger public listings in India, ultimately reinforcing India’s position as a compelling destination for high-growth companies to both operate and list publicly, which ultimately serves the interests of public and other investors.
—The authors; Pavan Sisodia and Susanjit Praharaj, are Tax Partners at EY India. The views are personal.
