Sebi eases regulations for startup founders and public sector cos to boost capital market
The Securities and Exchange Board of India (SEBI) has approved new rules. Startup founders can now hold employee stock options after listing. Alternative investment funds get co-investment opportunities. Public sector companies can voluntarily delist with relaxed norms. Foreign funds will benefit from eased investment rules. These changes aim to boost investment and simplify regulations for businesses in India.
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Mumbai: The board of India's capital markets regulator on Wednesday cleared a draft of measures to enable ease of doing business, including allowing startup founders to continue holding employee stock options (Esops) even after listing, extending co-investment opportunities to alternative investment funds , and permitting voluntary delisting of public sector companies.Currently, rules require founders to be classified as promoters at the time of filing of initial public offering (IPO) documents. However, once listed as promoters, they are ineligible to hold or be granted share-based benefits. If they hold Esops at the time of filing of offer documents, they are required to liquidate such benefits before the IPO."This provision has been found to be impacting founders," Sebi chairman Tuhin Kanta Pandey said.They are "classified as promoters at time of filing of DRHP (draft red herring prospectus)," Pandey said.The regulator said the new rule would facilitate founders who received such benefits at least one year prior to the filing of DRHP with Sebi, to continue to hold such benefits.It also eased norms for foreign funds investing in government securities. This comes at a time when several global index providers have included local sovereign debt in their respective bond indices, such as JP Morgan Global EM Bond Index, Bloomberg EM Local Currency Government Index and FTSE Russell Emerging Markets Government Bond Index.Sebi has harmonised KYC (know your client) requirements with the central bank norms.Meanwhile, Sebi also clarified that no new Esops could be issued to promoters after the company is listed. The regulator has also approved tweaking of rules on offer for sale.It said equity shares received upon conversion of fully paid-up compulsorily convertible securities received pursuant to an approved scheme would be exempted from the requirement of a minimum public holding period of one year.At present, this exemption is allowed only for equity shares acquired pursuant to an approved scheme. "This will assist the companies contemplating reverse flipping," the Sebi chief said.The Sebi board also approved the proposal to allow public sector companies (PSUs) to voluntarily delist from stock exchanges through a separate carve-out mechanism-provided the government holds more than 90% stake. There are five listed PSUs where government holding equals or exceeds 90%.This new rule would not be applicable to banks, non-banking financial companies and insurance companies.Currently, delisting is considered successful if the promoter's shareholding, along with shares tendered by public shareholders, reaches 90%.Under the proposed mechanism, PSUs could go private through a fixed-price delisting process, irrespective of whether their shares are frequently or infrequently traded. However, the fixed delisting price would need to be at least 15% premium over the floor price.The regulator has also relaxed the requirement of securing approval from two-thirds of public shareholders for delisting proposals.The Sebi board also approved the proposal to permit AIFs and investors to co-invest in unlisted companies through AIFs."Sebi's approval of a dedicated co-investment vehicle (CIV) framework under the AIF regulations is a breakthrough reform. It streamlines how accredited investors - already participants in AIFs - can co-invest in high-conviction opportunities alongside fund managers, aligns India with global norms, and removes longstanding friction around such structures," said Gopal Srinivasan, chairman and managing director, TVS Capital Funds.The new norms will allow both higher fund flows and limit regulations, experts said."This will further increase the flow of private--especially domestic capital--to entrepreneurial and growth businesses. By limiting CIVs to accredited investors, Sebi has also signaled a shift toward more principle-based, lighter-touch regulation for qualified participants," Srinivasan said. "Alongside the clarity on ESOPs for startup founders, this marks Sebi's strong commitment to innovation, deeper capital access, and sustained alignment among investors, founders, and fund managers," Srinivasan said.The regulator said a separate co-investment scheme would have to be launched for each co-investment in an investee company.
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