Through a series of regulatory changes, the Securities and Exchange Board of India (Sebi) has indicated its intent to boost the contribution of startups to the wider capital formation in India. In its first board meeting of FY26, the market regulator took a few key reformative decisions that will not only streamline public listing of startups but also smoothen the fundraising process for them.
Among the decisions taken under chairman Tuhin Kanta Pandey, Sebi will offer greater flexibility in employee stock option plans (ESOPs) for founders, and relaxed rules around compulsorily convertible securities (CCS). By lowering entry barriers, the market regulator is encouraging more startups to consider domestic listings which will help to deepen the capital pool. “These proposals will promote many startups when they go for public listing,” Pandey said in a media briefing.
The market regulator will now allow founders to continue to hold ESOPs issued at least one year prior to the filing of draft red herring prospectus (DRHP) even after being specified as the promoter/s and the company becoming a listed entity. Under the current regulations, founders need to be classified as promoters at the time of listing. However, the board has not approved any fresh issuance of ESOP to the founder/promoter in the run-up to the filing.
As per the earlier norms, once founders are designated as promoters, they become ineligible for ESOPs or the right to be granted share-based benefits; they were required to liquidate such benefits prior to the IPO (initial public offering). “This provision has been found to be impacting founders classified as promoters at the time of filing of DRHP,” Pandey said.
While relaxing norms for startups aiming to go public, the Sebi board made changes in conversion of fully paid-up CCS and requirement towards minimum promoter contribution (MPC).
Sebi has relaxed the one-year holding requirement for CCS converted under approved schemes. This makes it easier for startups returning to India to raise funds through public markets. Earlier, shares arising from CCS conversions had to be held for at least one year to qualify for offer-for-sale (OFS) during an IPO.
“This has resulted in certain investors not being able to participate in the OFS in public issue. Extending the exemption to equity shares arising from conversion of fully paid-up CCS received pursuant to approved scheme will facilitate such participation,” Sebi says.
This provision will also assist the companies contemplating reverse flipping which is shifting the country of incorporation from a foreign jurisdiction to India.
In addition, the market regulator has approved different category of investors such as alternative investment funds, foreign venture capital investors, scheduled commercial banks, public financial institutions, insurance companies (holding at least 5 percent post-issue capital) to contribute their equity shares towards the MPC. Earlier, only promoters could contribute CCS-converted shares toward the MPC required for IPOs.
The regulatory reforms are expected to reduce friction for startups relocating to India and aiming to go public.
“Sebi’s move marks a defining moment for India’s startup ecosystem,” says Harshil Mathur, CEO and co-founder, Razorpay. He adds that by empowering founders to stay invested and easing the road back home will fuel a future where the best Indian companies are built, scaled and celebrated in India.
The market regulator has made it mandatory for certain shareholders, including promoters, directors, key managerial personnel and employees, to hold their shares in demat form before a company files its DRHP. “Dematerialisation of securities has several benefits, which include reduction of frauds and forgery, elimination of loss and damage of securities, faster and more efficient transfers, improved transparency and regulatory oversight, mitigation of legal disputes etc,” says Sebi.
“Bringing in more shareholders in the demat process will reduce the number of physical share certificates and promote transparency and regulatory compliance,” says Ajay Garg, CEO, SMC Global Securities.
The market regulator also made it mandatory for listed companies to issue securities only in dematerialised form during corporate actions like share consolidation and split. This move is aimed at stopping the creation of new physical share certificates and encouraging more investors to hold their securities in demat form.
Angel funds
To ensure sustainable capital formation across the securities market and facilitate investments into startups, Sebi has revised the regulatory framework in connection with angel funds. “The board approved the decision to continue to regulate angel funds under the said framework while also rationalising the same,” Sebi said.
Ease of doing business measures for angel funds include relaxation of floor and cap for investment in an investee company from Rs25 lakh-Rs10 crore to Rs10 lakh-Rs25 crore respectively, removal of concentration limit of 25 percent of total investments of angel funds in an investee company, allowing contributions from more than 200 accredited investors in an investment and enabling follow-on investment in an investee company which is no longer a startup.
“To have their skin in the game, a sponsor or manager shall maintain a minimum continuing interest in each investment of the angel fund, at higher of 0.5 percent of investment amount or Rs50,000,” Sebi said.
Also read: Sebi board meeting: Market watchers await policy and transparency reforms
Voluntary delisting of PSUs
The Sebi board took a decision to introduce special measures to facilitate voluntary delisting of certain public sector undertakings (PSUs) where the shareholding of promoter or promoter group equals or exceeds 90 percent of the total shares issued. However, this exempts banks, non-banking financial companies and insurance companies.
Such measures include relaxations from requirement of two-third threshold for approving delisting by public shareholders and in the mode of computation of floor price.
In certain PSUs with minimal public float, the shares are traded frequently at prices which are not commensurate with operations, net worth, profitability and other financial parameters of the company. Therefore, delisting of such eligible PSUs would be only through a fixed price delisting process which shall be at least 15 percent premium over the floor price.
Benefit for FPIs investing only in G-Secs
The board has relaxed certain regulatory requirements for all existing and prospective foreign portfolio investment (FPIs) that exclusively invest in government securities (G-Secs). “These measures are expected to further help in facilitating investments by FPIs in G-Secs,” Sebi said.
FPI investment in fully accessible route (FAR) eligible securities has seen a significant increase and has crossed the Rs3 lakh crore mark in March. This is due to the inclusion of Indian G-Secs by several global index providers such as JP Morgan Global EM Bond Index, Bloomberg EM Local Currency Government Index and FTSE Russell Emerging Markets Government Bond Index.
The periodicity of mandatory KYC review for GS-FPIs will be harmonised with the Reserve Bank of India’s requirements. GS-FPIs will, therefore, have less frequent mandatory KYC reviews.
Existing and prospective FPIs that exclusively invest in G-Secs under FAR shall not be required to furnish investor group details. Such details are largely relevant for monitoring FPI exposures into equity and corporate debt only.
(With inputs from Naini Thaker)