SEBI Simplifies PSU Delisting and ESOP Rules: What Investors Need to Know?

In a move that boosts investor protection and market efficiency, the Securities and Exchange Board of India (SEBI) has introduced major reforms focused on easing the delisting process for government-owned companies (PSUs) and relaxing ESOP rules for startup founders along with other reforms.

These changes, finalized during SEBI's 210th board meeting, aim to reduce regulatory friction, encourage smoother exits for PSUs, and promote long-term value creation in startups.

PSU Delisting Made Easier:

SEBI has simplified the voluntary delisting process for certain Public Sector Undertakings (PSUs) where the government or other PSUs hold at least 90% of the company's shares. These changes aim to make exits faster and more efficient for companies with low public shareholding.

According to SEBI Chairman Tuhin Kanta Pandey, these new rules do not apply to government-owned banks, non-banking financial companies (NBFCs), or insurance companies. These sectors are excluded because they fall under additional regulatory requirements.

Key Changes:

• No need for two-thirds public shareholder approval, which was previously required and often stalled delisting efforts.
• PSUs can now delist using a fixed price mechanism, making the process faster and more transparent.
• The offer price must be at least 15% above the floor price, ensuring that public shareholders are compensated fairly.
• The floor price will be calculated based on the highest Volume-weighted average price over the past 52 weeks, highest price paid for any acquisition in the last 26 weeks, or a valuation by two independent SEBI-registered valuers.

Benefits for Small Investors:

To safeguard the interests of public shareholders who choose not to tender their shares:

• If the company is voluntarily shut down within 13 months of delisting, unclaimed shareholder payments will be transferred to a special account and held for seven years.
• After seven years, any remaining funds will be moved to the Investor Education and Protection Fund (IEPF), but investors will still be able to claim their dues from the fund.

"Many PSUs with low public shareholding trade far below their intrinsic value due to poor liquidity. This new framework will help these companies exit the stock market more efficiently, and it will be beneficial for investors if investors receive fair value and strong post-delisting protections, said Market Expert Rajesh Agarwal.

ESOP Relief for Startup Founders - Boosting IPO Appeal:

In a major relief to startup founders preparing for IPOs, SEBI has relaxed the rules around Employee Stock Options (ESOPs). Earlier, founders who were also promoters had to give up ESOPs before the IPO if they were not in compliance with promoter-shareholding rules.

Key Changes:
• Founders can now retain ESOPs granted at least one year before the IPO filing (DRHP).
• This rule applies even after the company gets listed, removing the earlier requirement to give up these stock options.

SEBI's relaxed rules on ESOPs will benefit startups in the following way says Angel Incestor, Mahavir Sharma.

• Founders remain financially invested in the company post-listing, aligning their incentives with shareholder interests.
• This change is expected to encourage more startups to list in India, especially those returning from overseas through "reverse flipping".
• Increases market trust and ensures better continuity of leadership post-listing.

Other Reforms:

These changes are part of a broader effort by SEBI to streamline capital market operations and improve investor experience. In total, 19 proposals were cleared during the board meeting, covering areas like:

• Regulatory flexibility for REITs and InvITs
• Co-investment options under Alternative Investment Funds (AIFs)
• Simplified IPO processes and disclosure norms
• Enhanced protections for shareholders in delisted entities