Startup Reality Confronted by SEBI: Desh Wapsi and IPOs Draw Attention
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India's Initial Public Offering (IPO) market continues to shine as a "beacon of resilience and growth" amidst global uncertainties, according to a recent EY report. This optimism is driven by several factors, including regulatory changes that make India a more attractive listing venue.
One of the most significant changes is the relaxation of shareholding norms for IPO-bound startups in India. This regulatory shift primarily facilitates founders retaining their Employee Stock Options (ESOPs) without forfeiture after going public and enhances investor exit visibility and confidence.
Founders can now keep a significant portion of their ESOPs post-IPO, which helps retain their commitment and motivation towards the company’s growth after listing. This move aligns with global best practices for founder compensation and deferred incentives. However, it's important to note that the existing legal definitions still restrict issuing new ESOPs to promoters under current company laws.
The relaxation of ESOP norms removes a major hurdle for startups planning IPOs, potentially leading to more startups entering the public markets in India. Alongside these changes, SEBI has also reduced minimum equity dilution requirements for large firms, improving liquidity and investor exit visibility by enabling smoother and size-flexible public listings.
Tighter disclosure and lock-in norms for promoters and pre-IPO investors enhance overall transparency and market confidence around investor exits during and after IPOs, improving market depth and governance.
The changes are not just technical but foundational, sending a clear message that the Indian public markets are ready to accommodate innovation-heavy, venture-backed companies. Several marquee names are in the final stages of filing their DRHPs, and if the macro climate stabilizes, India could still witness a late-year IPO surge thanks to both domestic confidence and the repatriation of its most valuable startups.
The current IPO environment is also driving a complementary trend of reverse flipping, with more startups opting to shift their domiciles back to India. Groww and IPO-bound Meesho are among the most prominent names to reverse flip to India in 2024 and 2025, respectively. The stakeholders believe that this preliminary step towards the changes was much-needed not only for the public listing of startups but to create an overall healthier ecosystem.
The reforms could create a healthier cycle in the startup ecosystem, where funds get exits, companies return money to the limited partners (LPs), these LPs see returns, and then reinvest. This cycle is crucial for the continued growth and development of India's startup sector.
In summary, SEBI’s relaxed shareholding and ESOP norms promote founder retention, maintain governance discipline, and improve investor exit visibility, thus fostering a more conducive environment for startup IPOs in India.
- The relaxation of ESOP norms for startups in India's IPO market could instigate more venture-backed businesses to opt for initial public offerings, as the changes foster a more favorable environment for investing and business growth within the technology sector.
- With the enhancement of transparency, market depth, and improved investor exit visibility, the modified startup ecosystem in India could potentially stimulate a cycle of funds receiving exits, limited partners seeing returns, and subsequent reinvestment, fostering the growth and development of the nation's technology-driven business sector.
