THE GREAT INDIAN IPO RUSH IN LIGHT OF THE 2025 SEBI ICDR REGULATIONS 6 10

Abstract

The 2025 amendments to Regulation 56 of the SEBI ICDR Regulations significantly reshape startup compensation structures and governance norms. Earlier, only Employee Stock Options (ESOPs) could survive beyond the Draft Red Herring Prospectus (DRHP), while Stock Appreciation Rights (SARs) and other incentive schemes had to be terminated before listing. The new framework permits issuance of equity shares from SARs post-DRHP, provided they are granted exclusively to employees under recognized schemes and fully allotted before the Red Herring Prospectus (RHP). These SAR-linked shares also enjoy the same lock-in exemptions as ESOP conversions. For Indian startups, particularly in capital-intensive technology sectors with delayed profitability, this reform enhances flexibility while addressing governance challenges tied to founder dominance and external funding reliance. SEBI‘s clarification that pre-IPO ESOPs granted at least one year before the IPO may be exercised post-listing had raised governance concerns, as promoters already benefit from sweat equity and dual-class share structures. Additional ESOPs risk disproportionate enrichment. Cases like Paytm, WeWork, and Gokaldas Exports highlight risks of control concentration and ESOP misuse. Restricting SARs to employees with oversight mitigates these concerns, though ambiguities remain over unvested and cash- settled SARs post-DRHP, and their interaction with pre-IPO instruments like convertibles and placements.