Industry cheers SEBI’s move to ease co-investments, ESOP norms for founders

India’s capital markets regulator, Securities and Exchange Board of India (SEBI), has cleared a slate of reforms to open up new avenues for private capital investment, particularly through alternative investment funds (AIFs), while simultaneously easing ESOP rules for startup founders and streamlining angel fund operations.

The centrepiece of the regulator’s 210th board meeting on June 18 was the formal introduction of co-investment schemes (CIVs) under the AIF framework—a long-standing demand from investors and fund managers seeking flexible deal-by-deal investment options.

What has changed?

SEBI will now allow Category I and II AIFs to create dedicated CIV schemes—essentially limited-life, deal-specific investment vehicles—for accredited investors to co-invest alongside the fund in unlisted companies. Previously, such co-investments had to be routed through a separate PMS (portfolio management services) license.

"This is a bold step from SEBI," Kush Gupta, Director at SKG Investment & Advisory, told YourStory. "It allows fund managers to issue a separate class of units to co-investors … providing them more conviction and giving managers more capital to chase larger opportunities."

Kaushal Kapadia of Multiples Alternate Asset Management added, "Until now, such structures had no formal recognition in India. CIV schemes will bring enhanced governance, alignment, and flexibility.”

These schemes will co-exist with the current PMS route, giving fund managers the ability to choose the most appropriate structure.

“This marks a pivotal shift,” noted Gopal Jain, Managing Partner at Gaja Capital and Regulatory Affairs Committee, IVCA. “It brings clarity, structure, and operational ease to a long-in-demand practice … and aligns India with global norms.”

Gopal Srinivasan, MD of TVS Capital Funds & Senior Board Member of IVCA, echoed that sentiment. “This will further increase the flow of domestic capital into growth businesses … and shows SEBI’s move toward principle-based, lighter-touch regulation.”

However, Vivek Mimani, Partner at Khaitan & Co, noted that reforms have fine print that needs to be carefully looked at. "As proposed in the Consultation paper, the terms of investment and timing of exit should provide for alignment of interests. The introduction of the CIV will also ensure that adequate control with respect to timing and terms of exit is similar, thereby aligning the interests of the fund and co-investors. As long as the investment manager has adequate allocation policies, expanded advisory rights should not result in any misalignment of interests."

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ESOP relief to founders of IPO-bound startups

India’s securities regulator has introduced a long-awaited amendment to ease the path for startup founders heading to the public markets, allowing those classified as promoters to retain and exercise employee stock options (ESOPs) granted prior to filing for an initial public offering.

Under the revised framework, founders can now hold and exercise ESOPs if the grant was made at least one year before the submission of the draft red herring prospectus (DRHP). The change addresses a longstanding pain point in India’s listing regulations, which previously required promoters to liquidate such benefits before going public.

“This is a strong step forward,” said Pushkar Thakur, Managing Partner at Corrida Legal. “It aligns regulatory frameworks with the realities of fast-growing tech ventures.”

The regulatory update could be particularly impactful for new-age companies planning IPOs, many of which are led by founder-promoters who have built significant value through equity-linked compensation. Until now, India’s rules treated founders as promoters in DRHP filings, prohibiting them from retaining ESOPs—an issue that many in the startup ecosystem flagged as misaligned with global norms.

“This is essentially grandfathering an existing benefit,” said Sudhir Bassi, Partner at Khaitan & Co. “The one-year cooling-off period ensures the relaxation isn’t misused and maintains regulatory integrity.”

The Startup Policy Forum welcomed the move, calling it “a big relief” that would allow founders to enjoy “skin-in-the-game” benefits even post-IPO and better align their interests with long-term shareholders.

The relaxation comes with limits. SEBI clarified that proposals to allow fresh ESOP grants to promoters after filing the DRHP were not accepted by the board. Only ESOPs granted more than a year before IPO documentation are covered.

(The copy was updated with more quotes.)