Desh Wapsi & IPOs: SEBI Catches Up With Startup Reality

In a recent move, the Securities and Exchange Board of India (SEBI) has announced two major relaxations in the shareholding norms for the IPO-bound startups, which are expected to foster a more conducive environment for Indian startups eyeing pubic listings in the country.

During the regulator’s meeting in Mumbai last week, its board approved a proposal that will now allow startup founders, who also want to identify themselves as company promoters, to retain their employee stock options (ESOPs) if issued at least a year ahead of the IPO.

While giving a nod to this long-pending proposal from the startup ecosystem, SEBI has also relaxed the norms for investors to offload shares in companies that are going public in India after reverse flipping.

The developments have been welcomed with open arms by the key stakeholders, from investors to startups and legal firms, who see it as a positive step to enabling the new-age tech companies that are aiming for public listings.

Abhimanyu Bhattacharya, partner at Khaitan & Co., said, “Some of the new-age issuers in fintech, ecommerce, who were domiciled overseas, were facing certain issues while reverse flipping their holding structures to India. The matter was under discussion for the last six to 12 months. Some of the relaxations will clearly help those issuers which had issued convertible securities to investors in their overseas holding structure.”

It is important to mention that Meesho, PhonePe, Razorpay, InMobi, Flipkart, and Pine Labs are some of the top IPO-bound startups that are either in the process of reverse flipping or have recently changed their domiciles back to India as they prepare for their respective public listings. At a time when more Indian startups are opting to reverse flip, these measures by the market regulator open up the gate for more companies to seamlessly plan their IPOs in the country. 

Harshil Mathur, CEO and cofounder of IPO-bound Razorpay, believes that SEBI’s move empowers founders to stay invested by easing the way to change domicile back to the country. “This step fuels a future where the best Indian companies are built, scaled, and celebrated right here. It’s not just a policy tweak, it’s a signal that India is ready to be the world’s innovation hub.”

Why The Change In Norms Matters?

India has become one of the world’s most active IPO markets in recent years, even as listings in some of the top global markets have been sluggish. A favourable regulatory environment and bullish investor sentiment in the equities market also led to an increasing number of startups to participate in this trend.

While the SEBI also eased many norms from time to time to encourage the public listings of new-age tech startups yet, regulatory roadblocks have often hindered the momentum for startup IPOs. The existing norm around founders holding ESOPs was one such, and it was raising concerns among companies going public. 

So far, SEBI regulations have mandated that founders with more than 10% shareholding be classified as promoters at the time of filing the draft red herring prospectus (DRHP). But the condition for the promoters and members of the promoter group is that they liquidate their ESOPs prior to the IPO.

In its disclosure this month, the markets regulator noted that “this provision was impacting founders classified as promoters” at the time of filing of DRHPs.  

“The proposal approved by the Board shall facilitate founders who received such benefits at least one year prior to the filing of DRHP with the Board, to continue holding, and/or exercising such benefits even after being specified as the promoter/s  and the company becoming a listed entity,” said SEBI.

Khaitan’s Bhattacharya said, “Companies Act and SEBI regulations do not permit promoters to hold stock options presumably to avoid a conflict of interest. However, in the case of most new-age tech startups, a significant part of the  founder’s compensation is often tied up with these stock options.”

“This entire regulatory conundrum was hindering some of the new age issuers who are planning to list in the next 12 to 18 months from filing DRHPs, because in certain situations, the founders were liable to classified as promoters and are also sitting on a whole bunch of stock options, which they cannot hold once they are classified as promoters for the purposes of the IPO,” he said.

Hence, this measure by SEBI is expected to clear a major roadblock for startup IPOs. Meanwhile, there is another part to the recently relaxed norms, which pertains to the startup investors.

Earlier, investors holding stakes in an overseas company in the form of compulsorily convertible securities (CCS) had to wait for at least a year post its IPO in India, before they could offload their stakes in the company. This often hindered the investors, particularly in companies that were earlier domiciled overseas and went public in India after a reverse flip, from participating in the offer for sale during the IPOs. 

After the norm revision, an IPO-bound logistics player told Inc42 that by allowing CCS-converted equity to be part of an OFS, SEBI has significantly improved exit visibility for early investors.

SEBI, while announcing the new relaxations with an objective of ease of doing business, said, “Extending the exemption to equity shares arising from the conversion of fully paid-up CCS received pursuant to approved scheme will facilitate such participation. This will assist the companies contemplating reverse flipping.”

Startups Get Shot In The Arm

Even as the regulations have just been announced and many are waiting to observe by when and how the implementation takes place, the stakeholders believe this preliminary step towards the changes was much-needed not only for the public listing of startups but to create an overall healthier ecosystem.

Requesting anonymity, the founder of an IPO-bound startup, said that for growth-stage companies with global investor bases, reverse flipping was riddled with friction. 

“I know of a couple of startups who explored redomiciling, but the biggest friction for them wasn’t operational — it was regulatory ambiguity around CCS and shareholding eligibility at IPO. SEBI’s clarification reduces the perceived regulatory risk of reverse flipping, making India a more competitive listing venue vis-à-vis the US or Singapore,” the person said, emphasising that these changes are not just technical, but foundational

“It sends a clear message now that the Indian public markets are ready to accommodate innovation-heavy, venture-backed companies.”

It goes without saying that the investors are also more bullish following the CCS norm revision. Saurabh Singh, partner at Trifecta Capital, believes that SEBI’s intent with these changes is to improve liquidity and help more investors participate in IPOs.

“Maybe, at a macro level, what might come out of this is better liquidity because the liquidity of startup stocks right now isn’t great; it’s not easy to liquidate shares, and that’s a concern for exit strategies. If these changes help simplify the listing process and reduce friction around IPOs, then it will naturally improve liquidity in the startup space,” Singh said.

Elaborating on the cycle, he said that once funds get exits, companies return money to the limited partners (LPs). These LPs then see 25-30% IRR, realised returns, and then they reinvest. “So, all that money flowing out of the system, when it comes back to LPs and they see performance, they reinvest in the ecosystem. If these reforms make IPOs smoother, exits easier, and post-listing participation wider, it can create a healthier cycle.”

A Quick Overview Of The Startup IPOs

Earlier this year, Inc42 predicted that at least 23 new-age tech startups were set to sail their IPO boats and were looking to raise over INR 55K Cr ($6.4 Bn) cumulatively. However, amid the geopolitical crisis in various parts of the world, uncertainty around trade tariffs and monetary policies has pulled the plug on the IPO momentum this year.

The first half of the year 2025 witnessed comparatively subdued startup IPO action. Only two Indian startups, Ather Energy and Aris Infra, took a leap of faith towards listings. Despite a year-on-year decline in the total number of IPOs in the Indian equity market, a latest EY report showed that India ranked among the top IPO markets with $2.8 Bn raised in Q1 2025. In the quarter, a total of 63 IPOs also exceeded markets like the US and other Asian nations.

The latter half looks more positive. A slew of marquee startups are also getting their DRHPs in line.

Adarsh Ranka, partner and financial accounting advisory services leader, Indian member firm of EY Global, said in the report that India’s IPO market continues to be a “beacon of resilience and growth”. 

“The strong performance in Q1 2025, despite global uncertainties, highlights the robust fundamentals and investor confidence in our market. We are optimistic that this momentum will carry forward, driven by supportive policies and a dynamic economic environment.”

Interestingly, the current IPO environment is also driving a complementary trend that could shape the next wave of tech listings in India, reverse flipping. As more startups weigh their public market options, an increasing number of them are opting to shift their domiciles back to India, lured by a surging economy, access to deeper domestic capital markets, and evolving regulatory clarity.

In 2024, Groww emerged as one of the most prominent names to reverse flip to India. More recently, IPO-bound Meesho has also reportedly completed its “desh wapsi” after receiving the NCLT’s nod for domicile transfer. These moves underscore how India’s public markets are not just maturing but also becoming central to the scale ambitions of homegrown tech startups.

As the latter half of 2025 approaches, several marquee names are in the final stages of filing their DRHPs. If the macro climate stabilises, India could still witness a late-year IPO surge thanks to both domestic confidence and the repatriation of its most valuable startups.

[Edited by Shishir Parasher]