When ESOPs Create Debt Before They Create Wealth 

An increasing number of Indian professionals now need loans to collect compensation they have already earned.

SEBI acknowledged that reality quietly in February when it responded to Avenue Supermarts, the owner of retailer DMart. The company had sought informal guidance from the market regulator whether designated employees could pledge company shares during trading-window closure to raise funds for exercising stock options and other bona fide purposes. The regulator said yes, subject to compliance approval and insider-trading safeguards.

SEBI's clarification reveals how compensation is increasingly wrapped in leverage.

Avenue Supermarts had asked SEBI three questions. The first two concerned financing ESOP exercises, while the third was more personal: whether a designated employee, a regulatory insider, could pledge company shares during trading-window closure to buy a house, repay a home loan or pay for a medical emergency. 

The regulator's answer was consequential and open-ended. The phrase "such as" in the regulations signals that the list of bona fide purposes is a sample, not a ceiling. What qualifies is decided case by case by the company's compliance officer under its Code of Conduct.

Employees at startups and the so-called New Age companies often receive significant portions of compensation through ESOPs and restricted stock. The gains on these are taxed when employees exercise options rather than when they sell shares, leaving many short of cash. Exercising options, paying tax and retaining ownership can require hundreds of thousands of rupees upfront.

Many employees now borrow to bridge that gap.

That financing ecosystem already existed, but largely out of sight. Senior executives quietly borrowed against shares through private banks and NBFCs. Some startups arranged bridge loans or secondary sales to help employees cover tax bills. Others watched employees let vested ESOPs lapse because costs and tax bills landed before cash did.

SEBI's clarification matters because the regulator explicitly recognises that employees may pledge shares to raise funds during trading-window closure, subject to pre-clearance and compliance checks. 

This was not the first such signal — SEBI had issued comparable guidance to Welspun Corp in August 2025 on the same question. The DMart letter confirms the pattern is solidifying across listed companies.

Hidden Leverage
Banks have long lent against property, gold and promoter shares. Employee equity is increasingly becoming another collateral class.

Leverage changes behaviour. Salaried employees with unencumbered stock think differently from those who pledge shares to pay tax. Market volatility no longer merely affects wealth; it affects borrowing capacity, refinancing risk and personal liquidity. Compensation starts to behave less like deferred salary and more like a leveraged bet.

SEBI's response suggests regulators recognise that shift. The letter distinguished between creating a pledge and invoking one, noting that invoking a pledge changes beneficial ownership and may look like a sale under insider-trading rules. 

When a stock falls and a bank calls in in the line during the cooling-off period, the contra-trade provisions may already have been triggered without the employee selling anything. Beneficial ownership changes hands and the regulations don’t pause to ask who moved first. The bank recovers its money; but the executive inherits the compliance violation.

Another risk lurks beneath the surface. Promoter pledges have repeatedly destabilised Indian markets because concentrated collateral tends to unravel quickly during when share prices fall. Employee leverage could recreate a similar fault line, quietly. If startup listings slow, secondary liquidity dries up or technology valuations compress sharply, pledged employee wealth could crack as collateral.

By handing the definition of "bona fide" to individual compliance officers, SEBI has also created scope for different answers to the same question. A designated employee at one company may receive pre-clearance to pledge shares for a medical emergency; the same transaction may be declined at another company with a more conservative Code of Conduct.

India spent a decade celebrating ESOPs as tools that align founders with employees and spread wealth. For many employees, the system depends on debt to function. The irony is that employees may technically own the wealth, but accessing it can require borrowing against it first.