The Securities and Exchange Board of India (“SEBI”) has recently released a Consultation Paper on March 18, 2025 (“Paper”), proposing amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”) and the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“SBEB & SE Regulations”). The proposed changes aim to streamline certain public issue processes, particularly in relation to the Offer for Sale (“OFS”), Minimum Promoters’ Contribution (“MPC”), and employee stock options (“ESOPs”) in cases where founders are later reclassified as promoters.
Clarifying Eligibility of Converted Equity Shares for Offer for Sale (OFS)
Under the current ICDR Regulations, only equity shares held for at least one year before the filing of the draft offer document are permitted to be offered for sale in an IPO. While Regulation 8 provides an exemption for shares acquired through schemes approved by courts or tribunals, it is silent on whether this exemption also applies to equity shares that arise from the conversion of compulsorily convertible securities (“CCS”) under such schemes.
SEBI has proposed to resolve this ambiguity by explicitly including converted equity shares within the exemption. The proposed explanation would clarify that equity shares resulting from the conversion of fully paid-up CCSs, acquired through an approved scheme, will qualify for exemption from the one-year holding requirement.
This amendment aligns Regulation 8 with Regulation 15 of the ICDR Regulations (which governs MPC), and recognizes the presence of invested capital rather than the form of the security. The rationale is that long-term investors should not be disqualified simply because their equity shares were issued upon conversion, especially in court-approved arrangements where the investment duration exceeds one year.
Equity Shares from Convertible Securities under Court-approved Schemes
The proposal further clarifies that shares arising from conversion of CCSs such as compulsorily convertible debentures or preference shares would be treated as equity shares for the purposes of Regulation 8 of the ICDR Regulations, provided the original investment was part of a restructuring scheme under Sections 230 and 234 of the Companies Act, 2013.
This clarification is important for corporate groups undergoing mergers, demergers, or internal restructurings where equity is issued through the conversion of such instruments. It removes unnecessary interpretational hurdles that may otherwise prevent eligible shareholders from participating in OFS due to technicalities in shareholding structure.
Clarifying ESOPs for Founders Later Classified as Promoters
Under the SBEB & SE Regulations, promoters and persons forming part of the promoter group are not eligible to be granted ESOPs. However, founders of startups are often granted ESOPs while still classified as employees and are only identified as promoters later typically at the time of filing the DRHP.
This has created uncertainty around whether such individuals can retain or exercise ESOPs already granted prior to their reclassification.
SEBI has proposed to insert an explanation to Regulation 9(6) to the SBEB & SE Regulations, clarifying that founders who are later identified as promoters in the DRHP will be permitted to hold, exercise, or avail ESOPs/SARs, provided that such benefits were granted at least one year before the board’s decision to undertake the IPO.
This amendment acknowledges the commercial reality that founders often receive ESOPs in lieu of salary or as part of long-term incentives. Treating a subsequent change in designation as a bar to exercising already granted ESOPs would be contrary to the intent behind such grants. The proposal mirrors provisions allowing employees to retain vested ESOPs upon resignation or retirement.
Our View
SEBI’s Paper is a welcome attempt to bring clarity and consistency to address the interpretational gaps and aligning provisions across the ICDR and SBEB & SE Regulations, SEBI has demonstrated a responsiveness to evolving market practices, especially in the context of founder-led startups, corporate restructurings, and investor-driven IPOs. The proposals also reflect an effort to make capital-raising more efficient without compromising the broader objective of investor protection.
That said, the Paper should not be viewed merely as a set of technical clarifications. It signals the need for a larger structural rethink of the current regulatory architecture. For instance, while aligning the treatment of convertible securities under Regulations 8 and 15 is helpful, it still leaves open questions about valuation timing, disclosure norms, and safeguards against opportunistic conversions close to the IPO. SEBI may consider issuing guidance or mandating third-party valuation certificates to prevent misuse, especially where converted equity is included in OFS or MPC. Similarly, the clarification on ESOPs granted to founders reclassified as promoters is timely, especially in the startup context. However, this should not be the endpoint. SEBI must begin a serious reconsideration of the promoter construct itself, which has become increasingly outdated.
From a long-term perspective, SEBI must consider moving beyond the legacy concept of "promoter" altogether—a view already acknowledged in previous consultations. India remains one of the few major jurisdictions to rely so heavily on this construct, which often creates artificial compliance hurdles and regulatory uncertainty. As India’s capital markets continue to mature, a more holistic and principle-based regulatory architecture, as opposed to a patchwork of exceptions, will be essential.
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