Sebi reforms focus on PSU delisting, startup Esops, easier path for foreign investments in govt bonds

The Securities and Exchange Board of India (Sebi) on Wednesday cleared a series of regulatory reforms aimed at improving market efficiency, investor access, and startup participation. Key among them were easing restrictions on employee stock options (Esops) for startup founders after listing and authorizing voluntary delisting of public sector undertakings (PSUs).

The board, led by Tuhin Kanta Pandey in his second meeting as Sebi chairperson, also approved changes to allow greater flexibility for alternative investment funds (AIFs), and eased compliance for foreign investors in sovereign debt. 

Esops for founders after IPO

Sebi allowed startup founders to retain employee stock ownership plans (Esops) after their companies go public—a shift from current norms that classify founders as ‘promoters’ upon IPO filing, thereby disqualifying them from Esop eligibility.

The proposals are also expected to help companies intending to list in India after shifting their domicile to the country, and relax certain requirements relating to share-based benefits granted to founders before the company goes for IPO.

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This move recognizes the role of founders who often trade salaries for equity, and ensures continued alignment with shareholders. These Esops not only align founders’ interests with those of other shareholders, but also offer them a continuing incentive to drive long-term growth.

To avoid misuse, Sebi mandated a one-year cooling-off period between Esop grants and IPO filing. The concern was that issuing Esops shortly before an IPO could be exploited to enrich insiders ahead of a public listing.

Voluntary delisting of PSUs

In a move aligned with the government’s strategic disinvestment agenda, Sebi approved a framework for voluntary delisting of PSUs. The new mechanism, subject to shareholder approval and safeguards, marks a significant shift from a traditionally restrictive regime that made PSU delisting rare and difficult.

The government, which owns majority stakes in several PSUs, has been pursuing strategic exits as part of its broader economic agenda. The new framework could expedite government exits and improve the efficiency of the disinvestment process.

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Pandey said that currently, only five such PSUs in the country were eligible for delisting.

Greater flexibility for AIF co-investments

Sebi cleared new rules to enable AIFs to offer co-investment opportunities via a co-investment vehicle (CIV), giving large investors enhanced access to high-quality deals. 

The co-investment route gives select AIF investors an opportunity to make additional investments in the same unlisted companies where the AIF has invested. This is done through a separate co-investment vehicle, which is structured as an independent scheme under an AIF.

In a related move, AIF managers can now offer advisory services across investor categories, regardless of whether their fund holds positions in those listed securities. This aims to boost operational flexibility and professional advisory capabilities.

The policy initiative will allow Category I and II AIFs to facilitate co-investment to accredited investors through co-investment schemes within AIF regulations, in addition to the existing option for co-investment available through the PMS route.

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A separate co-investment scheme shall be launched for each co-investment in an investee company subject to safeguards to ensure that the scheme is used only for Bonafide purposes.

Foreign investment in sovereign debt

Sebi approved a simplified framework for foreign portfolio investors (FPIs) investing exclusively in Indian government bonds (IGBs). Given the lower-risk nature of sovereign debt, registration and compliance norms will now be eased, making India more attractive to long-term global capital.

This reform is part of Sebi’s broader strategy to make Indian markets more accessible to low-risk global investors.

NSEL broker settlement

The Sebi board reviewed a settlement scheme for certain stock brokers against whom it had taken enforcement actions in the National Spot Exchange Ltd (NSEL) case. The stock brokers can settle the proceedings and seek quick conclusion of the proceedings, Sebi said.

However, the scheme won't be applicable to those brokers whose names appear in the charge sheet filed by any other law enforcement agency in the NSEL matter, and brokers who are defaulters at stock exchanges.

Rationalizing merchant bankers' regulations

Sebi allowed merchant bankers to undertake activities that it does not regulate, which are within the purview of any other financial sector regulator (FSR). The board also allowed merchant bankers to undertake activities outside the purview of Sebi and other FSR, only if they are fee-based, non-fund based, and pertains to the financial services sector.

This is a relaxation from the provision which had been approved by the board in December 2024. The Sebi board had then clarified that merchant bankers—excluding banks and public financial institutions—could undertake those activities that are related to the securities market and fall under Sebi’s jurisdiction.

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However, after internal review and feedback obtained from market participants, Sebi decided to relax the requirement. Other provisions approved by Sebi were unchanged.

Grievances arising from activities not regulated by any of the regulators, including Sebi, cannot be redressed by Sebi.

Rationalizing fund-raising for angel funds in AIF regulations

The board said angel investors will now need to be accredited investors who will be included as qualified institutional buyers (QIBs) for the limited purpose of investments into angel funds.

The accreditation process has been eased by reducing documentation as well as allowing KYC registration agencies to act as accredited agencies and permitting AIF managers to do due diligence for accrediting investors.

Settlement scheme for VCFs

The board proposed to introduce a one-time settlement scheme for venture capital funds (VCFs) for not winding up their schemes within the prescribed timeframes.

The settlement amount consists of two parts: ₹1 lakh for delay up to one year in winding up the scheme, and ₹50,000 for every subsequent year of delay; and an amount ranging from ₹1 lakh to ₹6 lakh depending on the cost of unliquidated investments as on the date of application for migration. The last date for applying for the scheme will be 19 January, 2026.

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