ESOP in a Private explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
An employee stock option scheme is a further issue of shares under Section 62(1)(b) — a carve-out from the rights-issue default. The mechanics for an unlisted company live in Rule 12 of the Share Capital and Debentures Rules.
For a private company the process is manageable. Two things catch people out: the eligibility exclusion that keeps promoters and 10%+ directors out — and the start-up exemption that reverses it.
If you're a founder planning to grant yourself options, that second point is the whole article.
Special resolution to approve the scheme, then MGT-14. Minimum one year between grant and vesting. Exercise price is entirely your choice. Promoters and directors holding over 10% are excluded — unless you're a DPIIT-recognised start-up within ten years of incorporation. Register in SH-6, and PAS-3 in thirty days on exercise.
Who can actually receive options?
"Employee" under Rule 12(1) means:
- a permanent employee of the company, in India or abroad; or
- a director, whole-time or not — but not an independent director; or
- an employee or director of a subsidiary or holding company, in India or abroad.
But it excludes:
- an employee who is a promoter or belongs to the promoter group; and
- a director who, alone or through relatives or any body corporate, directly or indirectly holds more than ten per cent of the outstanding equity.
The start-up exemption
Here's the reversal. The proviso to Rule 12(1) says both those exclusions don't apply to a start-up company, as defined in the DPIIT notification, for ten years from incorporation or registration.
That changes everything for an early-stage company. A founder-director holding 40% is ineligible under the general rule — but is perfectly eligible if the company is a DPIIT-recognised start-up within ten years of incorporation.
Two cautions. The relaxation was originally five years and was extended to ten, so confirm the current period. And the exemption follows recognition, not self-description — you need a valid DPIIT recognition certificate, not just a belief that you're a start-up. DPIIT start-up relaxations →
What approvals do you need?
| Step | Approval | Filing |
|---|---|---|
| Approve the scheme | Special resolution | MGT-14 within 30 days |
| Grant to employees of a subsidiary or holding company | Separate special resolution | MGT-14 |
| Grant to one employee in a year of 1% or more of issued capital | Separate special resolution for that grant | MGT-14 |
| Vary the scheme's terms | Special resolution, and the variation must not prejudice option holders | MGT-14 |
The explanatory statement to the notice has to disclose a long list — total options, classes of employees eligible, the appraisal process, vesting requirements and period, the maximum vesting period, the exercise price or its formula, the exercise period and process, any lock-in, the maximum options per employee and in aggregate, the valuation method, the conditions on which vested options lapse, the window to exercise on termination or resignation, and a statement that the company will comply with applicable accounting standards.
Draft that once, properly. You'll reuse it.
The terms the Rules actually fix
Vesting: minimum one year between grant and vesting. (The exception is options granted in substitution for options of a transferor company in a merger — there the clock runs from the original grant.)
Exercise price: your call. Rule 12(4) leaves it entirely to the company, subject to conformity with the applicable accounting standards. There's no statutory floor at face value or fair value. That flexibility matters enormously to an early-stage company granting options at a nominal price.
Lock-in: your call too. The company is free to specify a lock-in on the shares issued on exercise.
No shareholder rights before exercise. Option holders have no right to dividend, no vote, and no other benefit of a shareholder until shares are actually issued.
Options are personal and untransferable. They can't be transferred, pledged, hypothecated, mortgaged, encumbered or alienated, and are exercisable only by the employee granted them.
On death, disability, resignation:
- Death in employment — all options granted to that date vest in the legal heirs or nominees.
- Permanent incapacity in employment — all options granted as at that date vest on that day.
- Resignation or termination — unvested options expire. Vested options may be exercised within the period the scheme specifies.
Money paid at grant may be forfeited if the option isn't exercised in the exercise period, or refunded if the options never vest because the vesting conditions weren't met.
What you have to disclose and record
In the Board's Report, every year: options granted, vested, exercised and lapsed; total shares arising from exercise; the exercise price; any variation of terms; money realised on exercise; total options in force.
Plus employee-wise details for: key managerial personnel; any employee receiving 5% or more of the options granted in that year; and any employee granted options in a year equal to or exceeding 1% of issued capital at the time of grant.
In Form SH-6 — the Register of Employee Stock Options. Particulars of every grant, entered forthwith, kept at the registered office or wherever the Board decides, and authenticated by the company secretary or a Board-authorised person. Statutory registers →
What happens when someone exercises
- Board resolution allotting the shares.
- Receive the exercise price through banking channels.
- File PAS-3 within thirty days under Section 39(4). A Section 62(1)(b) issue is not a Section 42 private placement, so the fifteen-day PAS-3 timeline doesn't apply here.
- Share certificates within two months, or demat issuance where Rule 9B applies.
- Update the Register of Members and SH-6.
- Pay stamp duty on the certificates under State law.
- Deduct TDS on the perquisite. The difference between fair market value at exercise and the exercise price is a perquisite under Section 17(2)(vi) of the Income-tax Act, taxable in the employee's hands with a TDS obligation on the company. Eligible start-ups get a deferment benefit under Section 192(1C).
That last point is where employees get an unpleasant surprise: tax falls due at exercise, on shares they can't sell. Make sure your scheme communication says so.
Key takeaways
- Promoters and 10%+ directors are excluded — unless you're a DPIIT-recognised start-up within ten years.
- The exemption follows the DPIIT certificate, not your self-description.
- Minimum one-year vesting between grant and vest.
- No statutory floor on the exercise price.
- Unvested options expire on resignation. Vested ones survive for the scheme's window.
- Options can't be transferred or pledged, ever.
- PAS-3 in thirty days, not fifteen — this isn't a private placement.
- Tax hits at exercise, on the FMV spread. Warn employees.
Read next
- Rights Issue under Section 62(1)(a)
- Private Placement under Section 42
- DPIIT-Recognised Startups: Company Law Relaxations
- Statutory Registers a Private Company Must Maintain
- Demat of Shares by Private Companies (Rule 9B)
Disclaimer: Positions stated as on 4 September 2026. The start-up relaxation period and DPIIT criteria have been amended before and may change again. The tax treatment here is summarised only and needs separate advice.