Currently, rules mandate that founders be classified as promoters at the time of filing initial public offering (IPO) documents. Once listed as promoters, employee stock options (ESOPs) cannot be issued to them.
The capital market regulator believes the current rules do not clearly specify whether a founder holding ESOPs-who is subsequently categorised as a promoter-can exercise the granted options, both vested and unvested.
Founders of many new-age tech companies often receive ESOPs instead of cash-based remuneration in their early years, aligning their interests with those of other shareholders. However, as these companies raise funds from external investors, the founders’ shareholding tends to get diluted.
“The proposed changes in ESOP rules recognise the ‘skin in the game’ incentive for such founders, with corresponding benefits to all other stakeholders,” said Ketan Dalal, managing director, Katalyst Advisors.
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“The issue of ESOPs has always been a contentious one, because the perception often is that it leads to dilution of public shareholding and may also be used as a tool for unjust enrichment of those in management.”The regulator is also considering a one-year cooling-off period between the grant of ESOPs and the company’s decision to pursue an IPO. It believes allowing share-based benefits shortly before IPO filing could be prone to misuse.”The one-year period may need to be revisited, given that circumstances for making a public offer change rapidly, and a shorter period may be justified,” Dalal said.
PSU Delisting
The Sebi board, chaired by Tuhin Kanta Pandey, is also likely to consider allowing public sector companies (PSUs) to voluntarily delist from stock exchanges through a separate carve-out mechanism-provided the government holds more than 90% stake.
The regulator is of the view that certain PSUs have a thin public float and weak financials. Some, though currently profitable, may lack long-term prospects due to outdated product lines or government decisions to sell off assets.
In a discussion paper released last month, Sebi noted that since the shares of these companies are held by the government, they tend to offer perceived security to investors. This often results in elevated market prices that may not reflect the actual book value. “If such PSUs are to undertake delisting, being frequently traded, the 60-day volume-weighted average market price would need to be considered. This would result in a higher floor price and, consequently, a greater budgetary outlay for the government,” Sebi said.
