How to Achieve Minimum Public Shareholding in Listed Companies through ESOPs?

What is ‘Minimum Public Shareholding’ (MPS)?

The Minimum Public Shareholding (MPS) rule is a regulatory requirement laid out by SEBI under Rule 19(2)(b) and 19A of the Securities Contracts (Regulation) Rules, 1957, and reinforced by Regulation 38 of the LODR Regulations.

As per these rules, all listed companies must ensure that at least 25% of their total issued and paid-up equity share capital is held by public shareholders—i.e., non-promoters and non-promoter group entities. 

The objective is to:

• Enhance liquidity in the market
• Promote fair price discovery
• Ensure broader participation and corporate governance

Companies are expected to meet this requirement within three years from the date of listing.

How can companies achieve ‘Minimum Public Shareholding’ (MPS)?

SEBI has allowed several mechanisms for listed entities to comply with MPS requirements. 

The most recent amendment (Circular No. SEBI/HO/CFD/PoD2/P/CIR/2023/18) issued in February 2023 brought both rationalization and expansion of these methods.

Here's a simplified list:

1. Public offer via prospectus
   
   
2. Offer for Sale (OFS) via primary market or stock exchange
   
   
3. Rights or bonus issues (where promoters forgo entitlement)
   
   
4. Qualified Institutions Placement (QIP)
   
   
5. Open market sale by promoters (within volume limits)
   
   
6. Transfer to Exchange-Traded Funds (ETFs)
   
   
7. Allotment of shares under ESOPs (Employee Stock Option Plans)

Each method has conditions, and some are more capital- or process-intensive. However, one of the most strategic and employee-aligned paths is via ESOPs.

Achieving Minimum Public Shareholding (MPS) in listed companies through ESOPs?

A key update from SEBI’s February 2023 circular allows listed companies to count shares allotted through employee stock option exercises toward meeting their Minimum Public Shareholding (MPS) obligations.

This benefit is subject to the following conditions:

• The contribution from ESOP allotments is capped at 2% of the company’s paid-up equity share capital.
• The ESOP scheme must comply with the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.
• Promoters and promoter group members must not receive shares under the scheme.

These guidelines apply regardless of whether the ESOP is administered directly or via an ESOP trust. What matters is the compliance with SBEB norms and the exclusion of promoters.

But why is this significant?

• ESOPs naturally align with ownership dilution: As employees exercise their vested options, new shares are issued, reducing the relative holding of promoters and increasing public float.
  
  
• No need for external capital raising: Compared to QIPs or public offers, ESOPs offer a lower-cost, less disruptive method of meeting MPS norms.
  

How can listed companies comply with the Minimum Public Shareholding (MPS) rule using ESOPs?

If you're a listed company with promoter holding above 75%, and your ESOP pool is underutilized, here’s how you can use it strategically:

• Accelerate vesting and exercises in a time-bound manner.
  
  
• Align exercise windows with broader MPS timelines.
  
  
• Use ESOP exercises in conjunction with open market sales or QIPs to reach the 25% threshold.

Exceptions to complying with the Minimum Public Shareholding (MPS) rule using ESOPs 

While the regulation is a positive step, one concern is interpretational:

The SEBI circular mentions "ESOP scheme", but it is not clear whether other forms of share-based benefits like Stock Appreciation Rights (SARs) or Employee Stock Purchase Schemes (ESPS), also governed by the SBEB Regulations are included.

If SEBI clarifies that these are within scope, it could further widen the usability of ESOP-linked MPS relief across listed entities.

Conclusion

While the 2% cap on using ESOP allotments toward MPS compliance might seem modest, it offers a strategic, internal-first pathway for listed companies to meet regulatory obligations.

That said, companies must approach this route with rigorous compliance. ESOP schemes must adhere to SEBI’s SBEB Regulations, and promoters must be excluded from participation. Additionally, companies must ensure accurate disclosures and remain compliant with insider trading, takeover, and LODR regulations. Stock exchanges are tasked with monitoring these activities, and any non-compliance is reported to SEBI on a quarterly basis.