The Securities and Exchange Board of India (SEBI) has proposed allowing founders to exercise employee stock options (Esops) or stock appreciation rights (SAR), even after they are classified as promoters when the companies are about to list. In a consultation paper released on Thursday, SEBI, however, said the Esops should have been issued to the person one year before the initial public offer (IPO).
Under the existing provisions of the Share Based Employee Benefits and Sweat Equity Regulations, ‘promoters’ and ‘members of promoter group’ are not entitled to receive Esops and an employee cannot be a promoter or member of the promoter group. But under the Companies (Share Capital and Debentures) Rules, the same provision is not applicable for startup companies up to 10 years from the date of its incorporation or registration.
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Calling the proposed move forward-looking and a good change, Kaushik Mukherjee, partner at Induslaw explained that this move will bridge the gap between the two set of regulations. “With this, as long as there is a one-year hiatus between the grant date and the date of the board meeting approving the issue, you’re fine. People can plan accordingly now,” he said.
The consultation paper noted that in many new-age tech companies, with each successful round of investments, the founders’ shareholding in the company gets diluted. “In order to keep the founders incentivised over the long run despite such dilution and avoid cash flow strains (attributable to enhanced managerial remuneration) on the company, the investors and the management of the company typically offer Esops to founders to boost their holdings and drive them to scale their ventures for a longer term,” it said, adding that in a number of cases, Esops are also performance-linked incentives offered to founders to keep them motivated and invested in the company.
The proposal seeks to bring clarity on the treatment of the outstanding share options granted to these founders-turned-promoters, enabling them to take benefit of the performance of the company after listing, said Payal Agarwal, senior associate at Vinod Kothari & Company.
However, the markets regulator also noted that “allowing options/ other share based benefits just prior to filing of the DRHP” may be prone to misuse. So, it has suggested a cooling-off or holding period of one year before these options can be exercised.
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