Regulating ESOPs in India's New-Age Tech Companies: Challenges and Recommendations

ESOPs for Promoters: A Perk, a Problem—or a Puzzle India Still Hasn’t Solved?

If you’ve been following India’s tech IPO wave—and the debates swirling around it—you’ve probably heard the phrase “ESOPs for promoters” more than a few times. And not always in a good way.

What used to be a niche governance concern has suddenly turned into a hot-button issue, thanks to a handful of high-profile cases and SEBI’s evolving stance. At the heart of the matter is a deceptively simple question: Should start-up founders—especially once their companies go public—still be allowed to receive ESOPs?

Let’s Start with the Flashpoint: Paytm

This conversation really caught fire when SEBI settled a case involving Paytm, its founder Vijay Shekhar Sharma and his brother. According to SEBI’s order, Sharma had allegedly tried to sidestep the “promoter” label in the run-up to Paytm’s IPO—largely because that label would have made him ineligible to receive a ₹2.1 crore ESOP grant.

Under SEBI’s current rules, once you’re tagged as a promoter, you can’t receive ESOPs—whether your company is private or listed. The logic? To prevent top management from disproportionately enriching themselves while public shareholders take the risk.

Start-ups Had an Exemption—for a Reason

India’s start-up ecosystem doesn’t follow the old corporate playbook. Founders routinely see their equity stakes shrink across multiple funding rounds. To keep them motivated and aligned with long-term growth, SEBI allowed promoters of unlisted start-ups to receive ESOPs—a rare exemption from the usual prohibition.

And frankly, it made sense. If you strip founders of equity, then refuse to let them earn it back via ESOPs, you risk turning visionaries into employees. The exemption helped keep skin in the game.

Where It Gets Murky: The IPO Crossover

Here’s the knot SEBI’s now trying to untangle: What happens to ESOPs granted just before an IPO—but which vest after listing? Are they allowed to stand? Should they be cancelled? Or does full disclosure make it okay?

SEBI seems to be leaning toward a compromise—letting founders keep ESOPs validly granted before listing, as long as everything is disclosed.

Why Governance Experts Are Wary

Proxy advisors and institutional investors are not exactly cheering from the sidelines. Their concern is this:

“If you allow ESOPs to flow to promoters after listing—even if granted earlier—you blur the line between founder incentive and promoter privilege.”

They argue it erodes governance safeguards and tilts the playing field. Once a company is listed, public money is at stake. And without robust disclosure and shareholder approval, promoter ESOPs can feel like backdoor enrichment.

The Other Side of the Coin: Founder Fatigue Is Real

Of course, there’s another view—one that founders and start-up investors passionately defend.

Modern tech companies don’t run on factories and machinery. They run on people, and often, on the founder’s singular drive. Remove long-term incentives too early, and you risk losing that spark.

If listing means founders stop benefiting from value creation, the argument goes, you might discourage the very innovation that got the company there in the first place.

What Happens Abroad?

Here’s where things get even trickier. In the US and other developed markets, ESOPs for founders and top executives post-IPO are common—as long as they’re disclosed and approved. The checks and balances are built into shareholder votes and board oversight.

But India has its own unique twist: the “promoter” label, which doesn’t really exist elsewhere. That label comes with stricter rules, more responsibilities, and tighter scrutiny. Which is why a straight comparison doesn’t quite work.

Where SEBI Needs to Go From Here

So what’s the way forward? Most market experts seem to agree on a few essentials:

Set Clear Rules—Once and For All Right now, it’s all too grey. We need a black-and-white policy: can listed company promoters get ESOPs, or not?

Make Disclosure Non-Negotiable If a promoter gets ESOPs—whether pre-IPO or through some exemption—it must be disclosed in the IPO prospectus, annual reports, and shareholder notices.

Put It to Shareholder Vote Any sizable ESOP grant should need approval from non-promoter shareholders. That’s how you keep trust alive in a public company.

Take Notes from Global Practice, But Adjust for India Borrow the spirit of global best practices, but apply them in a way that respects the realities of India’s promoter-driven ecosystem.

Review, Don’t Freeze SEBI’s policy shouldn’t be written in stone. The market is evolving fast—rules should, too.

The Bottom Line

This issue—ESOPs for promoters—isn’t about technicalities. It’s about trust, alignment, and the future of India’s new-age public companies.

Strip away all the paperwork and regulatory language, and what you’re left with is a simple balancing act: How do we reward the people who built the company—without compromising the people who now own it?

If SEBI can land on a transparent, fair, and consistent framework, it could help India’s tech market grow up—and grow strong.