SEBI’s New Rules Ease Path for Indian Startups Eyeing IPOs

The Securities and Exchange Board of India has introduced significant regulatory changes that will make it easier for startups to list on Indian stock exchanges. According to Business Standard, SEBI’s startup compliance reforms are expected to accelerate both reverse-flipping trends and initial public offerings by emerging companies across various sectors.

The market regulator has scrapped the rule that barred startup founders and promoters from holding Employee Stock Options (ESOPs) and other share-based benefits when filing their draft red herring prospectus (DRHP) for an IPO. SEBI will now allow promoters to retain ESOPs granted at least a year before the DRHP filing but will continue to restrict the issuance of new ESOPs leading up to the filing.

Simplified Regulatory Framework

SEBI’s new startup compliance reforms address long-standing concerns about complex listing requirements that deterred many startups from going public in India. The regulator has streamlined documentation processes and reduced compliance burdens for qualifying startups, making public listings more accessible.

These changes come at a time when many Indian startups are reconsidering their corporate structures and exploring domestic listing options. The simplified framework removes several bureaucratic hurdles that previously made overseas listings more attractive than domestic ones.

The reforms also provide clearer guidelines for startups navigating the transition from private to public ownership. This clarity helps entrepreneurs and their advisors plan IPO strategies more effectively while ensuring investor protection remains intact.

Enhanced Rules for Growing Companies

SEBI’s new rules for startups include relaxed financial disclosure requirements for companies in their early growth phases. Startups can now present their financial information in formats that better reflect their business models and growth trajectories.

The new framework also provides exemptions for certain compliance requirements during the initial years after listing. This graduated approach recognizes that young companies need time to build robust compliance systems while focusing on business growth.

At a meeting led by chairman Tuhin Kanta Pandey, the Board scrapped the one-year lock-in for shares converted from fully paid-up Compulsorily Convertible Securities (CCS). The board noted, “This has resulted in certain investors not being able to participate in the Offer for Sale in public issue.”

Employee Stock Option Improvements

The updated ESOP guidelines by SEBI make it easier for startups to attract and retain talent through equity compensation. The new rules allow more flexible vesting schedules and provide clearer tax treatment guidance for employees receiving stock options.

Startups can now offer ESOPs to a broader range of employees, including consultants and part-time workers who contribute significantly to company growth. This expanded eligibility helps startups compete for talent with established corporations offering traditional benefits packages.

These regulatory changes will help companies planning a reverse flip, shifting their base from abroad to India for local listing. SEBI has also allowed shares held by foreign ventures, AIFs, and public financial institutions to count toward the minimum promoter contribution for a public issue.

Public Sector Delisting Changes

In addition to startup-focused reforms, SEBI has also introduced changes in PSU delisting rules that affect how public sector companies can exit stock markets. These modifications provide clearer exit mechanisms for government-owned entities while protecting minority shareholder interests.

SEBI has relaxed delisting rules for PSUs where the government holds over 90% stake. Chairman Pandey clarified that the change won’t apply to banks, NBFCs, or insurance firms and will benefit around five listed PSUs.

Market Response and Future Outlook

Early feedback from the startup ecosystem has been largely positive, with many entrepreneurs and investors welcoming the reduced regulatory burden. Investment bankers expect to see increased IPO activity as these reforms take effect. The changes position India’s capital markets as more startup-friendly, potentially attracting companies that might have otherwise listed elsewhere.

Although clearing corporations were not formally on the board’s agenda, SEBI chairman Tuhin Kanta Pandey said a working group has been set up to examine the unbundling of charges. He emphasized that these charges shouldn’t remain a “black box” and must be disclosed to investors. He also noted that the ownership structure of clearing corporations will remain unchanged, marking a shift from SEBI’s earlier view of separating them from parent exchanges.