What Are SEBI’s New Rules for Startup IPOs and ESOPs? Check Out Here!

In a significant move that could reshape India’s startup and capital market ecosystem, the Securities and Exchange Board of India (SEBI) has approved a series of regulatory changes aimed at making it easier for startup founders, public sector companies, and foreign investors to operate in India’s financial markets.

The decision, announced following SEBI’s recent board meeting, addresses long-standing concerns around IPO regulations, employee stock options (ESOPs), co-investments in startups, and the voluntary delisting process for public sector undertakings (PSUs). These reforms are expected to reduce friction, encourage domestic and foreign capital inflows, and align India’s regulatory framework with global best practices.

Let’s break down the key changes and what they mean for different stakeholders.

Startup Founders Can Now Retain ESOPs After IPO Listing

One of the most notable changes approved by SEBI is the relaxation of rules around employee stock options (ESOPs) for startup founders.

Until now, founders of startups were required to be classified as "promoters" at the time of filing the Draft Red Herring Prospectus (DRHP) — a mandatory document in the IPO process. However, under this classification, they were barred from holding ESOPs. Any ESOPs already granted had to be liquidated before the IPO.

This rule often worked against startup founders, many of whom hold ESOPs as a key part of their compensation and ownership structure.

Recognising this challenge, SEBI has now allowed founders to retain ESOPs if those benefits were granted at least one year prior to filing the DRHP. However, the regulator has clarified that no new ESOPs may be granted to promoters after the company is listed.

“This provision has been found to be impacting founders,” said SEBI chairman Tuhin Kanta Pandey, adding that the change would provide much-needed relief and encourage more startups to explore public listings in India.

This move brings India a step closer to global norms, where founders are typically allowed to retain share-based compensation post-IPO.

New Co-Investment Rules for AIFs Aim to Unlock Private Capital

In a bid to deepen the private investment landscape, SEBI has also approved a framework for co-investment opportunities through Alternative Investment Funds (AIFs).

The new framework will allow accredited investors who are already part of an AIF to make direct co-investments in unlisted companies alongside the fund. A separate co-investment scheme will be required for each company, ensuring transparency and regulatory oversight.

“This is a breakthrough reform,” said Gopal Srinivasan, Chairman and Managing Director of TVS Capital Funds. “It streamlines how accredited investors can co-invest in high-conviction opportunities, aligns India with global norms, and removes longstanding friction.”

According to Srinivasan, the move also indicates SEBI’s intent to shift toward a principle-based and lighter-touch regulatory regime for qualified participants, which could accelerate the flow of private — particularly domestic — capital to high-growth startups and entrepreneurial ventures.

SEBI Eases Entry for Foreign Investors in Government Securities

The board also cleared changes that will benefit foreign investors looking to invest in Indian government securities. With Indian sovereign debt being included in several key global indices — such as the JP Morgan Global Emerging Market Bond Index and Bloomberg’s EM Local Currency Government Index — India is set to attract significant global capital.

To facilitate smoother entry, SEBI has harmonised Know Your Customer (KYC) norms for foreign portfolio investors (FPIs) with those followed by the Reserve Bank of India. This move simplifies compliance for overseas investors and supports India’s efforts to become a more accessible investment destination.

Voluntary Delisting Mechanism for PSUs Introduced

SEBI has also introduced a new delisting mechanism for public sector undertakings (PSUs), which are majority-owned by the government.

Under the existing rules, delisting a company requires the promoter (in this case, the government) to acquire shares from public shareholders such that their holding reaches at least 90%, and the delisting must receive approval from two-thirds of public shareholders. This process has proven cumbersome, especially for PSUs where the government already holds a large majority stake.

To address this, SEBI has approved a carve-out mechanism for PSUs where the government holds 90% or more. These companies can now delist voluntarily through a fixed-price route, regardless of whether their shares are frequently traded.

The fixed delisting price must be at least 15% higher than the floor price determined by SEBI’s pricing methodology. This change applies only to PSUs and excludes banks, NBFCs, and insurance companies.

There are currently five listed PSUs that meet the 90% government holding threshold and could potentially make use of this delisting mechanism.

Clarity on Shareholding Norms to Aid ‘Reverse Flipping’

SEBI has also clarified rules regarding the minimum public shareholding period for equity shares obtained through the conversion of compulsorily convertible securities.

Under the new rule, shares received through such conversions, as part of an approved court scheme, will be exempt from the mandatory one-year holding period before being eligible for public sale. Earlier, this exemption applied only to equity shares acquired directly through the scheme.

This amendment could ease the process for startups contemplating reverse flipping — i.e., relocating their holding company back to India after having shifted it abroad.

“This will assist the companies contemplating reverse flipping,” Pandey said.

With many Indian startups previously choosing to incorporate overseas (especially in Singapore, the US, or the UAE) for regulatory or investment reasons, this move could encourage them to shift back to India.

Why These Reforms Matter

These regulatory updates reflect a shift in SEBI’s approach — from a gatekeeper to an enabler of growth.

For startup founders, the ESOP relief comes as a long-overdue acknowledgement of their role as wealth creators. For investors, both domestic and global, the co-investment and KYC reforms reduce entry barriers and create a more investor-friendly environment. And for public sector enterprises, the new delisting framework removes red tape and supports smoother exits.

Collectively, these reforms signal SEBI’s commitment to building a more inclusive, agile, and innovation-driven capital market.

India’s startup ecosystem is no longer at the margins of the economy — it is central to the country’s economic growth story. The recent SEBI reforms recognise this reality and aim to align policy with the needs of today’s entrepreneurs and investors.

Whether it’s enabling founders to hold on to what they’ve earned, unlocking new pools of capital, or streamlining exits for government firms, these changes are bold, timely, and aligned with the goal of making India a truly global financial hub.

If executed well, these measures could go a long way in strengthening investor confidence, improving market depth, and fuelling the next wave of startup IPOs and capital market activity.