SEBI's June 2025 ESOP Relaxation: Founders Can Now Keep Options Through IPO
SEBI's June 2025 board decision allows founders classified as promoters to retain, vest, and exercise ESOPs granted at least one year before DRHP filing—ending the forced surrender dilemma. Here's what the rule means, who it affects, and what founders planning an SME IPO must do now.
CA Harun Raaj
Chartered Accountant · Harun Raaj & Associates
Legal basis: SEBI) (Issue of Capital and Disclosure Requirements) Regulations 2018, Regulation 236 (SME IPO promoter lock-in) and Regulation 234(1)(h) (DRHP disclosure requirements); SEBI (Share Based Employee Benefits) Regulations 2021 — Effective: June 18, 2025 (SEBI Board decision). Source: law.asia/founder-esop-promoter-rules; implementing circular number to be verified at sebi.gov.in. Last reviewed by CA Harun Raaj: January 2025.
The Old Problem: ESOPs vs. Promoter Lock-In
Under SEBI (ICDR) Regulations 2018 and the SBEB Regulations 2021, founders holding ESOPs faced an impossible choice at IPO time. Promoters are required to maintain minimum lock-in commitments—for SME IPOs, Regulation 236 mandates at least 20% of promoter shares be locked in for 3 years post-listing. But earlier SEBI guidance created conflict: founders with unvested ESOPs were expected to surrender or exercise them before filing, with no clear path to retain options through the IPO.
For a founder with 1,00,000 unvested ESOPs at ₹1 exercise price and fair market value of ₹200 at IPO time, the math was brutal: exercise upfront and trigger ₹1,99,00,000 in perquisite tax under Section 17(2)(vi), or forfeit the options entirely. Neither outcome aligned with founder equity planning.
What SEBI Changed: The June 2025 Board Decision
On June 18, 2025, the SEBI Board approved a material relaxation:
Founders classified as promoters at the time of DRHP filing may now retain, vest, and exercise ESOPs, provided:
- The ESOPs were granted at least 1 year before the DRHP filing date.
ESOPs meeting this condition do not require surrender before IPO filing. Founders can allow existing vesting schedules to run their course through and after listing. The relaxation applies to both main board and SME IPOs.
Why the 1-Year Grant Window Is Critical Now
The 1-year lookback creates an immediate planning window. If your company targets DRHP filing in October 2027, any ESOPs you want covered under this relaxation must be granted before October 2026.
Founders at the ₹20–80 crore revenue stage, 18–36 months from an SME IPO, should formalise ESOP grants today if not already done. The clock is running.
How This Affects the IPO Timeline
Key point: The relaxation protects your right to vest and exercise ESOPs granted ≥1 year before DRHP filing; it does not waive the post-IPO promoter lock-in that applies to the shares you receive.
Practical Compliance Checklist for Founders
- Audit ESOP grant dates with Board resolutions. Each grant must be backed by a Board resolution and shareholder approval under Companies Act 2013 Section 62(1)(b). The 1-year clock runs from the Board resolution date, not the shareholder approval or grant letter date. Document this precisely.
- Verify SBEB Regulations 2021 compliance. Ensure your ESOP plan, trust structure (if applicable), ROC filings (Form MGT-14 under Section 117), and all amendments are on record before DRHP filing begins.
- Disclose all ESOPs fully in the DRHP. SEBI ICDR Regulation 234(1)(h) requires complete disclosure of all employee benefit schemes, including ESOPs. Your merchant banker will verify grant dates, exercise prices, vesting schedules, and cumulative grants during due diligence. Omissions or inconsistencies will delay IPO progression.
- Plan ESOP exercise timing with your CA. If you exercise ESOPs within 12 months of IPO listing, the perquisite income (Section 17(2)(vi), computed as FMV on exercise date minus exercise price) will be added to your personal income in that assessment year. Coordinate timing to avoid compressing large perquisite income into the pre-IPO financial year when other income may already be elevated.
- Understand lock-in on post-exercise shares. Shares acquired on ESOP exercise by a promoter remain subject to standard ICDR promoter lock-in (Regulation 236: 20% minimum for 3 years in an SME IPO). The SEBI relaxation protects the exercise right; it does not modify the post-conversion lock-in obligation.
Illustrative Example: A Founder's Timeline
Consider RealCo Pvt Ltd, a Hyderabad-based B2B SaaS company at ₹35 crore ARR, planning an SME IPO in Q3 FY 2027-28 (target DRHP filing: September 2027). The two founding promoters were each granted 50,000 ESOPs in August 2026 under a Board resolution and shareholder approval, at ₹10 exercise price, with 25% annual vesting over 4 years.
By September 2027 (1 year post-grant), the first 12,500 options per founder have vested. Under the SEBI June 2025 relaxation, these may be retained and exercised by the promoter-founders through and after the IPO—because the grant predates DRHP filing by ≥1 year. Remaining unvested options continue to vest per the 4-year schedule, vesting through and after listing.
When exercised, the perquisite income is computed on the exercise date FMV minus ₹10 exercise price, per Section 17(2)(vi). This is a CA-managed tax event, not an IPO obstacle. The shares issued are subject to the 20% lock-in under Regulation 236.
What HRA Can Handle for You
HRA works with merchant bankers and your tax advisors to:
- Audit ESOP grant documentation against SBEB Regulations 2021 and Companies Act 2013 requirements.
- Verify 1-year lookback eligibility for each grant as DRHP filing approaches.
- Prepare DRHP ESOP disclosure schedules with grant dates, vesting, and cumulative numbers.
- Coordinate with your CA on perquisite tax planning for pre- and post-IPO exercise events.
I'm CA Harun Raaj. If this affects your company's IPO timeline or ESOP structure, reach out.
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DISCLAIMER: This article is for educational purposes. SEBI's implementing circular for the June 2025 board decision should be verified at sebi.gov.in before reliance. Consult a SEBI-registered merchant banker and a Chartered Accountant for IPO-specific and tax advice.
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See Also
Frequently Asked Questions
Can a founder-promoter retain unvested ESOPs granted more than 1 year before DRHP filing?
Yes. Under SEBI's June 2025 board decision, ESOPs granted at least 1 year before DRHP filing may be retained and exercised by promoters, even if unvested at the time of filing. The vesting schedule continues through and after the IPO without interruption.
What is the 1-year lookback measured from?
The 1-year period runs from the ESOP grant date as recorded in the Board resolution, not the shareholder approval date or grant letter date. If DRHP filing is planned for October 2027, ESOPs must be granted on or before October 2026.
Do shares received on ESOP exercise by a promoter face lock-in after IPO?
Yes. Shares acquired on exercise of ESOPs by a promoter are subject to standard ICDR promoter lock-in under Regulation 236 (20% minimum for 3 years in SME IPOs). The SEBI relaxation covers the right to vest and exercise; it does not modify the post-conversion lock-in.
What tax consequences arise if a founder exercises ESOPs before or after IPO listing?
Perquisite income under Section 17(2)(vi) is computed at the fair market value on the exercise date minus the exercise price. This is added to the founder's personal income in the assessment year of exercise. Coordinate timing with your CA to avoid compressing large perquisite income into one year.
Must ESOP schemes be established before the 1-year grant window?
No. A new ESOP scheme set up just before the IPO is valid; the 1-year condition runs from the grant date under any scheme, not from scheme establishment. A scheme created today with a grant issued today will qualify for IPO filing in August 2027 or later.
What happens to ESOPs granted less than 1 year before DRHP filing?
ESOPs granted fewer than 1 year before DRHP filing do not qualify for the relaxation. The founder must either exercise them (triggering immediate perquisite tax) or surrender them before DRHP filing.
Must all ESOP grants and lapses be disclosed in the DRHP?
Yes. SEBI ICDR Regulation 234(1)(h) requires complete disclosure of all employee benefit schemes, including grant dates, exercise prices, vesting schedules, cumulative grants, exercises, and lapses. Your merchant banker will verify accuracy during due diligence.
Can a founder retain ESOPs on this relaxation and still meet the 20% lock-in requirement for an SME IPO?
Yes. The relaxation allows retention and exercise; it does not affect the promoter's lock-in obligation. A founder must meet the 20% lock-in requirement under Regulation 236 using eligible shares (which may include ESOP-derived shares), locked in for 3 years post-listing.
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