SEBI Proposes Clarifications on Minimum Holding Period and ESOPs for Founders

In an effort to simplify processes for public offerings, the markets regulator SEBI proposed clarifications on the minimum holding period for equity shares in Offer for Sale (OFS) and on employee stock options (ESOPs) for founders designated as promoters.

Consultation Paper on ICDR Regulation

In its consultation paper, SEBI recommended changes to the ICDR (Issue of Capital Disclosure Requirements) rules and the SEBI (Share-Based Employee Benefits and Sweat Equity) norms.

If implemented, these proposals would bring greater clarity and consistency, aligning the eligibility criteria for OFS and Minimum Promoter Contribution (MPC) requirements. The changes aim to standardize the treatment of shares obtained through various methods, such as the mandatory conversion of securities or approved schemes.

Regarding the minimum holding period for equity shares in OFS, SEBI suggested amending the rules to clarify that the holding period should include both fully paid-up compulsorily convertible securities and the resulting equity shares. This would extend the exemption from the one-year holding period to shares acquired through an approved scheme.

Under the current rules, equity shares in a public offering must be held for at least one year before filing the draft offer document. However, there is uncertainty about whether this rule applies to shares obtained through the conversion of fully paid-up compulsorily convertible securities (e.g., depository receipts).

Clarification on ESOPs

SEBI also proposed clarifying the treatment of ESOPs granted to founders before filing the Draft Red Herring Prospectus (DRHP). The regulator suggested adding an explanation that share-based benefits granted to founders would continue if the founder is classified as a promoter at the time of filing.

The restriction on new issuances under the Share-Based Employee Benefit Scheme (SBEB) for promoters would still apply to such founders classified as promoters, SEBI noted.

Currently, the SBEB Regulations do not explicitly address whether granted ESOPs (both vested and unvested) can be exercised when an employee is later categorized as a promoter. SEBI has invited public comments on these proposals until April 10.

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