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It has been a longstanding subject of regulatory debate as to when a founder should be identified as a promoter under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018. The interpretation adopted by the regulator until now has been that founders should be classified as promoters for initial public offering (IPO) purposes if they hold a position, or have a right to be nominated as, a director or key managerial personnel and collectively hold 10% or more of the company’s equity shares, whether directly, through controlled entities, or by means of immediate relatives.

This collective definition of shareholding means that even founders who individually hold less than 10% equity may be classified as promoters if their aggregate holdings, including those of controlled entities and relatives, exceed the threshold. As a result, many startup founders have, in the past, sought to keep their shareholding below 10% to avoid being labelled as promoters and suffering the attendant restrictions. At the same time, they have enjoyed the influence and privileges of actually being promoters.

The impact on the employee stock ownership plans (ESOP) that are held by founders who are eventually classified as promoters after taking advantage of such an expansive interpretation has been significant. The dilemma facing founders, once classified as promoters, is that they no longer fall within the definition of employee under both the Companies Act, 2013 and the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (SBEB regulations).

This exclusion meant that ESOPs held by such founders would either have to be cancelled or exercised while preparing for the IPO, effectively cutting off the founder’s ability to benefit from ESOPs after the listing. This created a problem. Founders, who are often the driving force behind a company’s growth, may lose a key component of their long-term incentive package just at the time the company goes public. This also meant that companies had to reconsider such packages and devise separate mechanisms to reward the founders.

This situation has changed significantly through a taken by the Securities and Exchange Board of India (SEBI) in its board meeting on 18 June 2025. Its proposal will allow founders who are classified as promoters at the time of filing of the IPOs to continue retaining, vesting and exercising the ESOPs granted to them. This relaxation is conditional on the ESOPs having being granted at least one year before the filing of the draft red herring prospectus.

The impact of this amendment will be two-fold. Not only will this proposal allow founders to hold and exercise their ESOP rights even after being classified as promoters in the listing of the company, it will also prevent last-minute grants that could be seen as circumventing the spirit of the regulations. The amendment will enable startups to make legitimate and good faith grants to persuade the founders to commit to the newly listed company for the long term.

SEBI’s new norms align the treatment of founders in an IPO with best practice globally where founders are given a significant portion of their compensation as ESOPs. The change will encourage companies intending to list in India by removing a key disincentive. No longer will there be forfeiture of ESOP benefits for founders turned promoters. The amendment will thus promote the deferred compensation structures typically built for founders and keep them invested through their capital, time and commitment in the growth of the company after its IPO.

The obstacle that the amendment raises is that the definition of employee under the Companies Act and the SBEB regulations remains unchanged. This means that although the alteration strikes a worthy balance between incentives and governance, the founders will still be unable to receive new ESOPs once specified as promoters in the listing.

SEBI’s decision does remove a longstanding pain point, supports founder retention and motivation and increases the attractiveness of IPOs for startups. As the definition of promoter continues to evolve, regulatory clarity and flexibility will be essential to sustain innovation, growth and leadership continuity in 含羞草社区 dynamic startup ecosystem.

Pooja Ramchandani and Kriti Kaushik are partners and Rakshita Mehta is an associate at Shardul Amarchand Mangaldas