From ESOP relief to G-Sec FPI push: SEBI greenlights major capital market overhaul

In its latest board meeting, the Securities and Exchange Board of India (SEBI) approved a comprehensive set of far-reaching reforms to make capital raising easier, improve investor protection, and reduce compliance friction across India’s capital markets. From allowing converted securities in OFS and easing FPI norms to empowering startup founders and revitalising the Social Stock Exchange, the regulator has signalled a bold, business-friendly direction. Here are the key decisions by the regulator:

1. More flexibility in selling converted shares through OFS

SEBI has now allowed shares arising from the conversion of instruments like debentures or preference shares to be eligible for Offer for Sale (OFS), provided they are held for at least a year. Earlier, this benefit was limited to shares from merger schemes. This change will enable more investors to participate in public offers, especially during restructuring.

2. Institutional investors can help meet promoter contribution

To ease IPO requirements, SEBI now permits certain institutional investors like AIFs, foreign venture capital funds, banks, and insurers to contribute equity shares (from converted instruments) toward the minimum promoter contribution. This was earlier restricted to promoters only. It simplifies fundraising for companies using schemes of arrangement.

 3. Founders allowed to retain ESOPs post-listing

SEBI has eased rules for startup founders who are classified as promoters. If they received ESOPs at least one year before filing the draft IPO papers, they can now continue to hold or exercise them post-listing. This helps protect founder incentives and supports startup listings. However, fresh ESOPs after listing are still not allowed for promoters.

4. Demat now mandatory for a wider set of IPO stakeholder

To improve transparency and reduce risks from physical shareholding, SEBI now requires not just promoters but also key management, directors, selling shareholders, large investors, and regulated financial entities to hold dematerialised shares before an IPO. This builds on earlier efforts to fully digitise securities.

5. QIP disclosure process made shorter and simpler

SEBI has streamlined documents for Qualified Institutional Placements (QIPs), reducing the size by up to 50%. Companies now only need to disclose issue-specific risks, summary financials, and a concise business overview. This benefits both issuers and institutional investors by cutting paperwork and bringing uniformity.

 6. Special exit route for certain over-90% govt-owned PSUs

SEBI has approved a simplified delisting process for public sector units where the government owns 90% or more (excluding banks and insurers). These PSUs can now delist at a fixed price with a 15% premium, and approval thresholds from minority shareholders are relaxed. Investors will still have a window to claim dues post-delisting.

7. Co-Investment opportunities made easier for AIFs

SEBI has allowed more flexibility for Category I and II Alternative Investment Funds (AIFs) to offer co-investment opportunities to their accredited investors. These co-investments—into unlisted companies where the AIF is also investing can now be offered under a separate co-investment scheme (CIS). Each CIS will be specific to one company and come with safeguards to protect main fund investors. Key conditions include aligned exit timelines with the main AIF and equal co-investment access for all eligible investors.

 8. SEBI eases rules for FPIs investing only in government bonds

SEBI has reduced compliance requirements for Foreign Portfolio Investors (FPIs) that invest solely in government securities now called G-Sec FPIs (GSFPIs). This move supports India’s inclusion in global bond indices and growing FPI interest in sovereign debt. Key relaxations include less frequent KYC reviews, exemption from providing investor group details and an extended timeline (30 days) to report material changes. Also, NRIs, OCIs, and resident Indian individuals can now participate in GSFPIs under relaxed norms, though existing restrictions under LRS and fund contribution rules still apply.

9. Portfolio manager disclosure document simplified

SEBI has made it easier for portfolio managers to comply with disclosure norms by splitting their disclosure documents into two parts static and dynamic. The static part covers general information that doesn’t change often, while the dynamic part includes updates specific to investors. This restructuring will make it simpler for both managers to update and investors to understand relevant changes without reading an entire bulky document.

10. SEBI allows use of liquid and overnight mutual funds for compliance deposits

Investment Advisors (IAs) and Research Analysts (RAs) can now use liquid mutual funds and overnight funds alongside fixed deposits to meet their regulatory deposit requirements. These fund units must be earmarked in favor of the SEBI-approved Administration and Supervisory Body (ASB). This long-standing industry demand gives more flexibility to IAs and RAs and enables better use of capital while ensuring compliance.

SEBI has also announced a fresh set of reforms aimed at streamlining operations and encouraging participation across diverse segments of the capital market. To boost fundraising through the Social Stock Exchange (SSE), SEBI has expanded the types of eligible entities to include trusts, societies, and Section 25 companies, and replaced the rigid “Social Impact Assessment” with a more flexible framework involving professional assessment organizations.

Fundraising must now happen within two years of SSE registration to retain active status. In a significant ease-of-doing-business move, SEBI has also withdrawn the earlier requirement for venture trustees and custodians to segregate regulated and unregulated activities into separate entities, aligning with similar relief provided to merchant bankers.

For REITs and InvITs, SEBI has clarified public unit-holding norms, allowed loss offsets at the holding company level, streamlined reporting timelines, and standardised trading lot sizes. Lastly, to accelerate onboarding and compliance, SEBI will now issue certification norms for market intermediaries through regulatory orders rather than the official Gazette, reducing procedural delays and simplifying the certification process.