New ESOP Rules for Founders of Tech Startups in the Offing

India’s Securities and Exchange Board (SEBI) is reportedly considering new rules to address concerns about founders of tech startups and their family members owning stock options.

Sources told Reuters that SEBI is looking to amend its rules to bar startup founders, with rights equivalent to promoters, from owning shares under employee stock ownership plans (ESOPs).

The move comes amid concerns that some founders may have reduced their shareholding to below 10% to avoid being classified as promoters and become eligible to own stock options.

Currently, promoters are banned from owning ESOPs but have rights to direct the board of directors and nominate directors.

New Regulations to address misuse of norms by Founders of Tech Startups

SEBI is said to be examining gaps in current regulations and looking at the misuse of norms. The new norms, which may be implemented later this year, would be implemented through amendments to SEBI’s stock options rules and may include all structures for equity holding.

A 20-member panel, led by former Chief Justice of Punjab and Haryana High Court Shiavax Jal Vazifdar, is also looking into how founders should be defined and is working on a report to simplify and strengthen norms around mergers and acquisitions and fundraises.

A final decision on the matter is expected to be made later this year.

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