• Founders can keep Employee Stock Options (ESOPs) after an IPO, aligning incentives and boosting retention.
  • Reverse-flipping is simplified, making it easier for foreign-domiciled startups to list back in India.
  • Co-investment avenues open for AIFs, widening institutional support for emerging ventures.

The Securities and Exchange Board of India (SEBI) has introduced sweeping changes to IPO rules startup ecosystem.

The market regulator's board approved a proposal allowing startup founders to retain their stock options even after their companies are listed, with certain provisos.

At present, the founders are designated as promoters when submitting the Draft Red Herring Prospectus (DRHP), which renders them ineligible for employee stock option plans (ESOPs).

As a result, promoters must liquidate these stock options before the listing.

Following the amendment, the regulator has made the exemption available for shares from conversion of compulsorily convertible securities (CCS) issued under such an approved scheme.

“The proposal approved by the board shall facilitate founders who received such benefits at least one year prior to the filing of DRHP with the board, to continue holding, and / or exercising such benefits even after being specified as the promoter/s and the company becoming a listed entity,” the SEBI said in a statement.

SEBI has also proposed alternate investment funds (AIFs) and foreign venture capital funds, which hold at least 5 per cent of the post-issue capital, or any equity within the promoter group, to contribute equity shares resulting from the conversion of convertible securities (CCS).

This contribution can be used to meet the minimum promoter contribution requirement, in addition to the contributions from the promoters.

SEBI has also approved a proposal to revamp the regulatory framework for Angel Funds under the AIF regulations, which aims to improve the conduct of business.

As per the new rules, angel investors will be required to register as "accredited investors".

They would also have to verify their investor status based on the thresholds that are consistent with market levels.

Furthermore, the Board has approved a proposal to amend existing rules to allow qualified institutional buyers (QIBs) to invest in Angel Funds, but for specific purposes only.

Edited by Annette George