Overview
An Employee Stock Option Plan (ESOP) gives eligible employees the right to buy company shares at a predetermined price after a vesting period. Unlisted companies issue ESOPs under Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, which require a special resolution and a minimum vesting period of one year. Listed companies follow the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.
What Is an ESOP?
An ESOP is an option, not a share. The employee is granted options, which vest over time or when milestones are met, and can exercise the vested options by paying the exercise price to receive shares. ESOPs help attract and retain employees without an immediate cash cost to the company.
ESOPs in Chennai / Tamil Nadu
ESOP rules are national. Stamp duty is payable on share certificates issued on exercise under Tamil Nadu law for Tamil Nadu companies, or through the depository for demat allotments.
Design Considerations
The design needs to settle the size of the pool, the vesting schedule and cliff, the treatment of good and bad leavers, the exercise window, liquidity or buy-back mechanisms, whether a trust structure is used, and the interaction with investors’ shareholder agreements. The perquisite tax on exercise, and the deferral available to eligible startups, must be reviewed with a tax advisor.
ESOP, Sweat Equity and SARs Compared
Equity-linked rewards come in several forms.
| Instrument | How it works | Typical use |
|---|---|---|
| ESOP | Option to buy shares at a set price after vesting | Retaining and rewarding employees |
| Sweat equity | Shares issued for know-how or value addition | Rewarding specific contributions |
| Stock appreciation rights | Reward linked to share value, often paid in cash | Where share issue is not wanted |
Who Can Receive ESOPs?
Excluded: Promoters, members of the promoter group, and directors who hold more than 10% of equity, directly or indirectly. For startups, these persons are eligible for up to 10 years from incorporation.
- Permanent employees in or outside India.
- Directors, whether whole-time or not, other than independent directors.
- Employees of a subsidiary, holding company or associate company.
Key Requirements
- A special resolution approving the plan, with the disclosures listed in Rule 12.
- A minimum vesting period of one year between grant and vesting.
- A register of ESOPs in Form SH-6.
- Disclosures in the board’s report.
- An exercise price and a valuation approach suited to both tax and accounting.
Process
- Decide the pool size and the key terms.
- Draft the scheme and the grant letter.
- Obtain board approval.
- Pass a special resolution at a general meeting and file MGT-14.
- Issue grant letters and maintain SH-6.
- On exercise, allot shares and file PAS-3, and complete demat where required.
ESOP Lifecycle Terms
Knowing the terms keeps grants consistent.
| Term | Meaning |
|---|---|
| Grant | The offer of options to an employee |
| Vesting | The point when options become exercisable, after a minimum period of one year |
| Exercise | The employee pays and receives shares |
| Lapse | Unexercised options expire |
How KVA Handles ESOP Design & Implementation
Karthick Vijayakumar & Associates, Company Secretaries, supports you through each stage with a single point of contact and a clear record of what has been done.
| Step | Stage | What KVA does |
|---|---|---|
| 1 | Requirement review | We understand your entity, objective and timeline, and confirm what ESOP Design & Implementation involves for your specific facts. |
| 2 | Document checklist | You receive a clear list of documents, particulars and approvals needed, with gaps flagged early. |
| 3 | Preparation and filing | Our team prepares, reviews and files the required forms and records, and tracks each acknowledgement. |
| 4 | Completion and follow-up | We hand over final records and explain the compliance that follows, so nothing is missed afterwards. |
Fees and Timeline
MCA fees are payable on MGT-14 and PAS-3. Professional fees are available on enquiry. Setting up a plan typically takes 2–4 weeks.
Why Karthick Vijayakumar & Associates
Work is handled by company secretaries who deal with statutory filings and governance every day.
Timelines for ESOP Design & Implementation are tracked so that approvals and filings do not slip.
Plain-language updates at each stage, with no guesswork about what is pending.
Organised, decision-ready documentation that supports audits, banks and future filings.
Frequently Asked Questions
One year from the date of grant.
Not generally. Startups can grant ESOPs to promoters and to directors holding more than 10% for up to 10 years from incorporation.
No. They are excluded under the Rules.
Yes. The plan must be approved by a special resolution.
The Companies Act does not cap the pool for unlisted companies. Investor agreements usually do.
The employee is taxed on the perquisite at exercise, and on capital gains when the shares are sold. Eligible startups can defer the tax.
The plan’s terms decide this. Typically, unvested options lapse and vested options must be exercised within a defined window.
No. Options are not transferable and can be exercised only by the employee, or by the employee’s legal heirs in the event of death.
A trust that holds shares for the scheme, used to manage allotments and liquidity. It is subject to Section 67 and the related Rules.
Yes, where the company is required to issue securities only in demat form under Rule 9A or 9B.
ESOPs are options granted at an exercise price. Sweat equity shares are issued at a discount or for consideration other than cash under Section 54, for know-how or value addition.
An ESOP gives employees the right to buy shares at a fixed price after a vesting period, aligning their interests with the company’s growth.
The price at which the employee may buy shares after vesting. It is set in the scheme and may be at or below fair market value, with tax effects for the employee.
The minimum initial period during which no options vest, after which a portion vests, with the rest vesting over the remaining schedule.
A board resolution, a special resolution of shareholders and compliance with the Companies (Share Capital and Debentures) Rules, including a valuation and records to be maintained.
Eligible startups enjoy some relaxations, including promoters and directors holding more than 10% being eligible for ESOPs for a certain period, as the Rules provide.
Options need the employee to pay the exercise price, while Restricted Stock Units give shares on vesting without payment, subject to conditions.
The perquisite value, the difference between fair market value and the exercise price, is taxed as salary on exercise, with further tax on sale of the shares. Startups have deferral options.
A register of employee stock options, the exercise records, the valuation reports, and disclosures in the board’s report.
Yes, subject to the FEMA rules and the tax laws of the employee’s country, and the structure should be checked in advance.
Planning an ESOP for Your Team?
Contact Karthick Vijayakumar & Associates to discuss the design and approval requirements of your employee stock option plan.
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