MUMBAI: The market regulator, the Securities and Exchange Board of India (SEBI), has proposed some changes in the rules around employee stock options plans (Esops) to help IPO-bound companies’ founders in exercising their Esops options, even if they have to be classified as promoters before the company goes public.
To ensure that this relaxation is not misused, the regulator has also proposed a cooling off period between the grant of such options and the IPO.
In a consultation paper released Thursday, SEBI has proposed that a person, who ceased to be an employee after having been identified as a promoter, be allowed to continue to hold his/her Esops, provided those Esops or other benefits were issued one year before the company announced the IPO plan.
Under the share-based employee benefits and sweat equity regulations, promoters and members of promoter group are not entitled to receive Esops and an employee cannot be a promoter or member of the promoter group.
But if founders are listed as promoters for an IPO, based on their holding including the options which were vested, because IPO norms require them to do so. In such a scenario, the existing norms do not clearly state whether the employee with the Esop (such as the founder) can exercise their Esops.
To resolve these ambiguities, Sebi has suggested the following amendments by adding an explanation to clause 9(6) of the SBEB regulations, 2023: If an employee, identified as a promoter or promoter group in the draft IPO document, who was granted options or other benefits under any scheme prior to being identified as a promoter/promoter group, shall be eligible to continue to hold, exercise or avail any such options in accordance with its terms and granted, prior to one year from the date when the company decides to go public.
The consultation paper clarifies that the changes are being suggested to because under the current regulations, an employee who is later categorised as a promoter may have to forgot these benefits even though the Esops were granted as part of the employee's compensation.
Also, "allowing options/other share based benefits just prior to filing of the IPO papers may be prone to misuse. Thus, it is necessary that a suitable cooling off period is maintained between the grant of such options/ other share based benefits and the time when the company decides to pursue an IPO." To balance the two, the regulator has suggested the one year cooling off or holding period.