Startup boost: SEBI allows startup founders to retain ESOPs before IPO

In a major boost for startup founders eyeing public listings, the Securities and Exchange Board of India (SEBI) has approved crucial changes to allow retention of Employee Stock Options (ESOPs) for promoters, addressing a long-standing regulatory bottleneck in the IPO ecosystem.

Until now, promoters were required to forgo any share-based compensation—such as ESOPs—before filing their Draft Red Herring Prospectus (DRHP). The latest amendment permits founders classified as promoters to retain ESOPs granted at least one year prior to DRHP filing. The move is expected to ease listing pathways for high-growth startups where founders typically hold equity-based compensation.

This change is part of a broader set of reforms approved at SEBI’s board meeting held on Wednesday.

New co-investment framework for AIFs

SEBI also cleared a regulatory framework governing co-investments in Alternative Investment Funds (AIFs), aiming to enhance transparency and protect investor interest in private market transactions. The norms mandate that co-investments by sponsors, fund managers, or co-investors must be on identical terms as the AIF—covering pricing, entry/exit timing, and valuation.

AIFs will also be permitted to create separate Co-Investment Vehicles (CIVs) for Category I and II AIFs. These vehicles can issue distinct units to co-investors, helping institutional and high-net-worth individuals invest alongside fund managers with better alignment and clarity.

“The approval of a dedicated CIV framework is a breakthrough reform. It removes longstanding friction and aligns India’s private capital market with global norms,” said Gopal Srinivasan, CMD, TVS Capital Funds.

Experts say the move will make India’s AIF ecosystem more attractive to domestic capital and reduce regulatory overreach by limiting CIV participation to accredited investors. SEBI’s emphasis on parity in terms and disclosures is seen as a push towards stronger governance standards in venture capital and private equity.

Kush Gupta, Director at SKG Investment & Advisory, noted, “This change allows fund managers to attract more sophisticated capital and deliver better performance. It’s a timely move as AIFs grow into a $155 billion industry.”

A broader reformist push

SEBI’s board meeting also included reforms related to Qualified Institutional Placements (QIPs) and the classification of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) as equity instruments. These changes are expected to deepen participation in India’s capital markets by improving clarity, reducing risk, and easing compliance.

“SEBI has announced several reformist changes that boost ease of doing business,” said Jyoti Prakash Gadia, MD, Resurgent India. “The ESOP decision, in particular, will incentivise founders to stay invested beyond IPO and continue creating long-term value.”

Taken together, the reforms signal SEBI’s shift toward a more facilitative, innovation-friendly regulatory regime that supports India’s growing startup ecosystem, public sector reforms, and alternative investment landscape.