In a major relief to companies stuck in regulatory limbo, the Securities and Exchange Board of India (Sebi) has eased its stance on initial public offerings (IPOs) by firms with large public shareholder bases. This clarification resolves a critical grey area that had delayed several high-profile IPOs for months and reaffirms Sebi’s evolving approach to regulating India’s dynamic capital markets.
With this regulatory change, companies such as HDB Financial Services, Hero FinCorp, and Vikram Solar—all of whom had filed their draft red herring prospectus (DRHP) last year—have now received the green light to move ahead with their IPOs. Sebi’s updated interpretation provides much-needed clarity on how it views large public shareholder counts in unlisted companies, especially when those shareholders entered through employee stock ownership plans (ESOPs) or secondary trades in unlisted markets.
Why These IPOs Faced Roadblocks
At the heart of the delay lay a legal and regulatory ambiguity. Sebi had taken a cautious approach in reviewing IPO applications from companies with a large base of public shareholders—many of whom had invested in secondary trades or through ESOP conversions without a formal public fundraising process. The issue centered around whether such companies, without launching a traditional public issue, had inadvertently violated the Companies Act, 2013, which mandates that any offering made to over 200 persons in a financial year must be treated as a public issue.
For companies like HDB Financial, which had over 41,500 public shareholders at the time of DRHP filing, and Hero FinCorp with around 7,500 shareholders, Sebi’s silence created uncertainty. Despite no public fundraising activity, these companies found their IPO plans frozen due to regulatory opacity.
Sebi Offers Long-Awaited Clarity
In recent weeks, Sebi has clarified that a high number of public shareholders doesn’t automatically disqualify a company from launching an IPO, provided the shares entered circulation through non-fundraising mechanisms such as ESOP conversions or secondary market trades. This change significantly impacts companies that faced delays despite not raising any capital directly from the public.
One source familiar with the matter said, “The matter is now settled. If the company hasn’t raised public funds through these share issuances, it’s not an issue. Many of these cases involve ESOP conversions or unlisted market trades, where the company had no direct role in fundraising.”
This clarification addresses the legal distinction between direct capital raising and secondary share transfers, an area where intent and execution often blur in practice.
IPO Approvals Begin Flowing
Sebi’s fresh interpretation has already translated into regulatory approvals for several companies:
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HDB Financial Services received the nod despite having a substantial shareholder base.
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Hero FinCorp, which had roughly 7,500 shareholders, secured its approval.
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Vikram Solar, with about 7,000 shareholders, also gained Sebi’s go-ahead.
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Waaree Energies, which had around 2,600 public shareholders, has since listed on the stock exchange.
These approvals affirm Sebi’s new stance and pave the way for more companies with large shareholder bases to enter the public markets.
How ESOP Conversions Shaped the Debate
The current regulatory flexibility stems from deeper recognition of how employee stock ownership plans (ESOPs) contribute to a growing and diverse cap table without breaching compliance thresholds. Companies frequently issue ESOPs as incentives, and these shares often get converted into equity well before an IPO. Many recipients later sell these shares through secondary market trades, resulting in a wide distribution of shareholding.
Ankita Singh, Managing Partner at Sarvaank Associates, explained, “The Companies Act permits ESOP grants and their eventual conversion to equity, even if that results in a large number of shareholders, as it doesn’t fall under the purview of private placement norms.”
However, Singh also flagged an important concern. “Where the legal line starts to blur is when these shares, ostensibly meant as employee incentives, become a tool for indirect public participation in a pre-IPO company. Unless the company is found to be raising funds through these transfers, the law doesn’t view it as a breach, but it certainly raises governance questions.”
Legal and Regulatory Implications
Apurva Kanvinde, Partner at Juris Corp, provided legal context, saying, “Under the Companies Act, 2013, an offer made to more than 200 persons in a financial year is treated as a public issue. However, ESOP issuances are exempt from this limit.” He noted that similar exemptions existed even under the Companies Act, 1956, especially for non-banking financial companies (NBFCs) and internal corporate actions.
Saumya Ramakrishnan, Partner at Bombay Law Chambers, pointed out that in negotiated private sales, the issuing company neither participates in the transaction nor receives any consideration. “Yet even genuine trades have drawn Sebi scrutiny at the DRHP stage due to technicalities,” she noted. These technical reviews sometimes delayed or complicated the IPO vetting process, even when no clear violation had occurred.
NSE’s Case: The Next Big IPO?
The National Stock Exchange (NSE), one of the most anticipated IPOs in India, also finds itself in a similar position. With its shareholder base swelling past 100,000, largely due to investor enthusiasm and pre-listing trades, NSE may benefit significantly from Sebi’s revised stance.
Although NSE has yet to file its DRHP, market watchers believe that Sebi’s clarified position could finally clear the path for the long-delayed IPO.
Governance and Transparency Still Under Scrutiny
While Sebi has removed one hurdle, the regulatory and governance lens remains firmly in place. Legal experts believe that Sebi will continue to evaluate IPO applications case by case, especially when the underlying transactions raise concerns about intent, structure, or timing.
Sebi may also consult the Ministry of Corporate Affairs (MCA) in cases where corporate actions stretch the boundary of existing laws. These consultations will help maintain regulatory consistency between capital market rules and company law, ensuring that investor protections remain intact.
Conclusion: A Step Toward Clarity and Growth
Sebi’s decision to ease its position on IPO approvals for companies with large public shareholder bases marks a significant development in India’s capital market regulation. The clarification removes a critical roadblock that affected major private companies ready to go public.
Firms like HDB Financial Services, Hero FinCorp, and Vikram Solar can now move forward, unlocking value for their shareholders and offering fresh opportunities for public investors. The move also sends a strong signal to other companies considering IPOs in the near term: As long as shareholding expansions don’t involve public fundraising, Sebi will not stand in the way.
Still, transparency, governance, and legal intent must remain at the center of every pre-IPO strategy. Companies, their advisors, and legal teams must structure ESOPs, secondary sales, and internal transfers with care—because even without direct fundraising, public interest always lies at the core of public markets.
