ESOP Structuring & Allotment for Private and Unlisted Companies
An employee stock option plan lets your team earn a share of the company they help build. We draft the scheme under Section 62(1)(b) and Rule 12, then prepare the approval papers and file every allotment when options are exercised.
What it is
An employee stock option, or ESOP, is a right given to an employee to buy the company’s shares at a fixed price on a future date. The employee is granted options today, the options vest after a set period, and the employee then exercises them by paying the exercise price. Only at that point does the company allot shares.
For unlisted companies the law sits in Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. Listed companies follow SEBI’s share-based employee benefit regulations instead. Allotments on exercise are reported to the ROC in Form PAS-3 on the MCA V3 portal.
Who it applies to
Startups paying part of salary in equity
Early-stage companies that cannot match market salaries and want key hires to share the upside.
Private companies keeping key managers
Think of an auto-components maker in Faridabad whose plant head has had three offers this year. Options that vest over four years give that person a reason to stay, without handing over control.
Unlisted public companies
Companies preparing for investment or a future listing, which need a scheme that will stand up to investor due diligence.
Why it matters
Keep good people for longer
Options vest over time, with at least one year between grant and vesting under Rule 12. Leaving early means walking away from unvested options.
Save cash today
Part of the reward comes as future value instead of salary. That helps while the company is still loss-making.
Clear investor due diligence
Investors check the ESOP pool, the approving resolution and the SH-6 register. Careful ESOP structuring means fewer questions at term-sheet stage.
Documents required
From the company
- Certificate of incorporation, MoA and AoA
- Latest audited financial statements
- Current shareholding pattern and authorised capital
- DPIIT recognition, if you claim startup relief
For the scheme
- Pool size and the classes of employees covered
- Proposed vesting schedule and exercise price
- Treatment on resignation, termination and death
At each exercise
- Exercise application and proof of payment
- Employee’s PAN and demat account details
- Merchant banker valuation report for tax (issued by the merchant banker), where shares are unlisted
Who can and cannot get options
| Person | Eligible under Rule 12? |
|---|---|
| Permanent employee, in India or abroad | Yes |
| Whole-time or other director (not independent) | Yes, unless they hold more than 10% of equity |
| Employee of a holding, subsidiary or associate company | Yes |
| Independent director | No |
| Promoter or member of the promoter group | No, except in a startup up to ten years from incorporation |
| Director holding more than 10% of equity, directly or indirectly | No, except in a startup up to ten years from incorporation |
Take a DPIIT-recognised software startup in Faridabad, four years old, whose technical co-founder holds 12% of the equity. In an ordinary company that 12% would rule her out. Here she can still receive options, because the company is within ten years of incorporation.
How it works
Size the pool and fix the terms
We agree with you the pool size, who qualifies, the vesting schedule, the exercise price and what happens when someone leaves. If you have an investor, we check the pool against your shareholders’ agreement.
Draft the scheme and explanatory statement
Rule 12 lists what the explanatory statement must disclose: total options, employee classes, vesting, exercise price or formula, lock-in and the accounting policy. We draft both documents together.
Pass the shareholders’ resolution
A public company needs a special resolution and files it in MGT-14 within 30 days. A private company can approve the scheme by ordinary resolution under its 2015 exemption.
Issue grant letters and keep the SH-6 register
We prepare grant letters and keep the Register of Employee Stock Options in Form SH-6 at the registered office.
Allot shares on exercise and file PAS-3
When employees exercise, the board allots the shares and we file the return of allotment in PAS-3 within 30 days. In practice, exercises arrive in batches, so we fix exercise windows that line up with board meetings. Non-small private companies must allot in demat form.
Timelines
At least one year to vest
Rule 12 requires at least one year between grant and vesting. Many schemes spread vesting over four years.
30 days for PAS-3
Each allotment on exercise is reported in PAS-3 within 30 days of allotment under Section 39(4).
Two months for certificates
Share certificates are issued within two months of allotment under Section 56(4)(b), or the shares are credited to the employee’s demat account.
What happens if the scheme goes wrong
Late PAS-3 costs money
Section 39(5) sets a penalty of ₹1,000 per day, up to ₹1 lakh, on the company and every officer in default. The filing fee itself rises 2× to 12× with delay.
Grants to the wrong people fail
Options given to an independent director, or to a promoter outside the startup window, fall outside Rule 12 and have to be unwound.
Employees face an unplanned tax bill
Here is the catch: tax arises on exercise, not on sale. In an unlisted company, an employee can owe tax on shares there is no market to sell.
Frequently asked questions
What is the minimum vesting period for ESOPs?
One year. Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 requires at least one year between the grant of options and their vesting. The company is free to set a longer period, and most schemes vest in tranches over three or four years. A one-year cliff followed by monthly or quarterly vesting is common. We set the schedule to match how long you actually want to keep each person.
Can a private company approve ESOPs by ordinary resolution?
Yes. Section 62(1)(b) asks for a special resolution, but the exemption notification of 5 June 2015 lets a private company approve an ESOP scheme by ordinary resolution. A public company, listed or unlisted, still needs a special resolution and must file it in MGT-14 within 30 days. Either way, the explanatory statement must carry every disclosure Rule 12 lists. We draft the notice and resolution so the approval is clean first time.
Can founders or promoters get ESOPs?
Only in a startup, and only for a limited period. Rule 12 normally excludes promoters, promoter-group members and directors holding more than 10% of equity. For a DPIIT-recognised startup, those exclusions do not apply for ten years from incorporation. So a founder of a five-year-old recognised startup can receive options, while a founder of an ordinary company cannot. We check your recognition date and incorporation date before drafting.
Can independent directors be given stock options?
No. Rule 12 expressly excludes independent directors from the definition of employee for ESOP purposes. Other directors, whole-time or not, can receive options as long as they do not hold more than 10% of the company’s equity, directly or through relatives or a body corporate. If you want to reward an independent director, sitting fees and commission are the usual routes. We map each board member’s eligibility before the scheme is approved.
What happens to options when an employee resigns?
Unvested options lapse on resignation or termination, and vested options can be exercised within the period the scheme allows. Rule 12 leaves the exercise window to the scheme, so the drafting matters. On death, all options vest in the legal heirs; on permanent incapacity, they vest immediately. Options cannot be transferred or pledged. A clear exit clause prevents disputes with former employees.
How are ESOPs taxed for employees?
In two stages. On exercise, the difference between the fair market value and the exercise price is taxed as a salary perquisite, and the employer deducts TDS. For unlisted shares, that value comes from a SEBI-registered Category I merchant banker, in a report dated not more than 180 days before exercise. On sale, capital gains are worked out using the fair market value at exercise as cost. If you plan both stages before the first exercise, nobody gets caught short.
Can startup employees defer the tax on ESOPs?
Yes, if the startup is an eligible startup. Eligibility needs both DPIIT recognition and an Inter-Ministerial Board certificate; recognition alone is not enough. Tax on the perquisite can then be deferred to a later date fixed by law, the sale of the shares or leaving the company, whichever comes first. We check this before employees rely on it. We can help with Startup India recognition too.
Is a valuation needed to set the exercise price?
Not under company law. Rule 12 lets the company fix the exercise price freely, as long as it follows the applicable accounting policies. A valuation still helps, because it supports the accounting expense. At exercise, the merchant banker valuation for tax is needed for unlisted shares. We arrange a share valuation report where the scheme calls for one.
What it costs
Our fee plus the government fee that applies to your case, quoted before you commit. Tell us the situation and we will price it exactly.
The government fee for each PAS-3 depends on authorised capital: ₹200 below ₹1 lakh, rising to ₹600 at ₹1 crore and above. Late filing multiplies it 2× to 12×. Valuation fees are charged by the valuer or merchant banker.
Ready to begin?
Tell us how many people you want to reward and over what period. We will take the ESOP structuring from pool size to PAS-3, so the scheme works for them and for your investors.