Introduction
Employee Stock Option Plans (ESOPs) have become a cornerstone of compensation structures in India’s private limited companies — especially startups and emerging growth enterprises. In an ecosystem where retaining key talent is as crucial as raising capital, ESOPs offer a practical way to share ownership without immediate cash outflow. When implemented properly, they align employees’ interests with long-term business success and strengthen commitment during critical growth stages.
However, issuing ESOPs under the Companies Act, 2013 isn’t merely a boardroom decision. It involves statutory approvals, shareholder resolutions, and timely filings with the Ministry of Corporate Affairs (MCA), such as Form MGT-14, PAS-3, and maintenance of the Register of Employee Stock Options (Form SH-6). This guide walks you through the end-to-end process of issuing ESOPs in India in 2025, including examples, compliance nuances, and insights from real-world practice.
What Exactly Is an ESOP and Why It Matters for Private Limited Companies
An Employee Stock Option Plan (ESOP) gives employees the right — not the obligation — to purchase shares of the company at a pre-determined price after a certain vesting period. In essence, it’s a deferred reward that turns loyal employees into stakeholders.
For example, consider a Delhi-based SaaS startup valued at ₹20 crore. Instead of paying large cash bonuses, it grants ESOPs worth 5% of its equity pool to early engineers. Over time, as the company’s valuation grows, the employees’ options convert into valuable shares. This ownership experience fosters deeper commitment than cash incentives could ever achieve.
In India, ESOPs for private companies are governed by Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. These provisions allow companies to issue ESOPs to employees, directors, or officers — but not to promoters or independent directors.
Step-by-Step Process to Issue ESOPs in India (2025 Edition)
Step 1: Designing the ESOP Scheme
Every ESOP journey begins with a well-structured ESOP Scheme. This scheme should clearly define eligibility, number of options, exercise price, vesting schedule, and exit mechanisms. It forms the legal foundation for the entire plan.
For instance, a company might decide that only employees who have completed one year of service will be eligible, with a vesting schedule of 25% each year over four years. The exercise price could be set at the fair market value (FMV) determined by a merchant banker.
A well-drafted ESOP Scheme also anticipates situations such as resignation, termination, or company sale — making it vital to seek professional drafting assistance. (For a deeper look into structuring ESOP pools and dilution management, see our related article on [ESOP Pool Creation and Cap Table Planning for Startups in India].)
Step 2: Board Approval of the Draft ESOP Scheme
The next step is to convene a Board Meeting to approve the draft ESOP Scheme and call for an Extraordinary General Meeting (EGM) to obtain shareholder approval. The Board Resolution typically references Section 62(1)(b) and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.
In practice, the resolution may read:
“RESOLVED THAT pursuant to Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, the draft Employee Stock Option Plan placed before the Board be and is hereby approved, and the same be recommended for shareholders’ approval at the ensuing Extraordinary General Meeting.”
This step demonstrates corporate governance discipline — ensuring that the decision to issue ESOPs is formally documented before seeking shareholder consent.
Step 3: Shareholders’ Approval by Special Resolution
Issuing ESOPs requires shareholder approval through a special resolution passed in an EGM. The explanatory statement in the notice must include essential details such as the total number of options to be granted, exercise price or formula, vesting period, and appraisal process.
Once approved, the company must file Form MGT-14 with the MCA within 30 days of passing the special resolution. The filing must include certified copies of the resolution, EGM notice, and meeting minutes.
In many cases, smaller private limited companies overlook this step or delay filing, leading to additional fees and penalties. To avoid this, ensure that your Company Secretary prepares MGT-14 immediately after the meeting. (For step-by-step filing guidance, refer to our article on [How to File MGT-14 on MCA V3 Portal – 2025 Update].)
Step 4: Grant of Options to Employees
After shareholder approval, the company can formally grant options to eligible employees under the approved scheme. This typically happens through a Grant Letter, detailing the number of options, exercise price, and vesting schedule.
For compliance, the company must maintain the Register of Employee Stock Options in Form SH-6, which records every grant, vesting, and exercise. This register must be kept at the company’s registered office and authenticated by the Company Secretary or a Director.
Consider a case where an employee receives 5,000 options at ₹50 per share, vesting over four years. Each year, the vesting must be reflected in the SH-6 register, showing how many options are now exercisable.
Step 5: Vesting and Exercise of Options
Employees become eligible to exercise their ESOPs only after the vesting period, which must be at least one year from the date of grant, unless the employee’s employment is terminated due to death or disability (in which case vesting can be accelerated).
When employees choose to exercise, they must pay the exercise price. The company then allots the corresponding shares within a reasonable timeframe. For example, if an employee exercises 2,000 options at ₹50 per share, the company receives ₹1 lakh and issues 2,000 equity shares.
At this point, the ESOP transforms from a right into actual ownership, and the company must record the new shareholder in its Register of Members (Form MGT-1).
Step 6: Board Approval for Allotment and Filing PAS-3
The allotment of shares under ESOPs must be approved through another Board Meeting. The Board Resolution authorises the issue and allotment of equity shares to employees who have exercised their vested options.
After allotment, the company must file Form PAS-3 (Return of Allotment) with the MCA within 30 days. This filing includes the list of allottees, the Board Resolution, and a valuation certificate if applicable.
Timely filing of PAS-3 ensures that the share capital details in the MCA database reflect the company’s latest equity structure. (For guidance, see [How to File PAS-3 Correctly in MCA V3 Portal (2025 Update)].)
Step 7: Issue of Share Certificates and Record Maintenance
Following the allotment, the company must issue share certificates within two months under Section 56(4) of the Companies Act, 2013. These certificates must bear proper stamp duty as per the applicable State Stamp Act, which varies from state to state.
It’s good practice to maintain both physical and electronic copies of share certificates and ensure that all details match the SH-6 register and the company’s cap table. Under MCA V3, electronic record-keeping is recognised as valid, provided the records are securely stored and retrievable.
Real-World Compliance Insights for 2025
In 2025, ESOP compliance in India has become more digitally integrated. The MCA V3 portal now allows e-filing of MGT-14 and PAS-3 with improved validation tools, reducing rejection rates. However, attention to document format and digital signatures remains crucial.
For companies granting ESOPs to non-resident employees or directors, compliance under FEMA 1999 also applies. Once shares are allotted to a foreign national, the company must report the transaction through Form FC-GPR within 30 days of allotment.
From a tax perspective, ESOPs are treated as perquisites under Section 17(2)(vi) of the Income Tax Act, 1961, taxable at the time of exercise. The difference between the fair market value and exercise price is added to the employee’s income. Upon sale of shares, capital gains tax applies based on the period of holding.
Common Pitfalls and Practical Advice
One of the most common compliance lapses is forgetting to file MGT-14 or PAS-3 on time, leading to additional fees and potential scrutiny during due diligence or funding rounds. Many startups also neglect to update their cap table after each allotment, causing discrepancies during investor negotiations.
It’s advisable to conduct an annual ESOP compliance audit to verify that SH-6 registers, board resolutions, and MCA filings are consistent. This ensures that when you approach investors or plan an exit, your ESOP records reflect full legal compliance.
For companies planning to grant options to overseas employees, consult FEMA guidelines or our detailed post on [FEMA Compliance for ESOPs Granted to NRIs and Foreign Employees].
Frequently Asked Questions
1. Can a private limited company issue ESOPs without becoming a public company?
Yes, private limited companies can issue ESOPs under Section 62(1)(b) and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. Conversion into a public company is not required.
2. Are promoters or directors eligible for ESOPs?
No, promoters and independent directors are specifically excluded from receiving ESOPs in a private limited company.
3. What are the mandatory MCA filings after ESOP allotment?
You must file MGT-14 (for special resolution) and PAS-3 (for allotment), maintain SH-6 register, issue share certificates, and pay applicable stamp duty.
4. What are the penalties for delayed filings?
Delayed filings of MGT-14 or PAS-3 attract additional fees and penalties under Sections 117(2) and 42(9) of the Companies Act, 2013, which may also affect due diligence reports during funding.
Conclusion
Issuing ESOPs in India is not merely a legal formality — it’s a strategic decision that shapes the ownership and motivation culture of a company. From drafting the scheme to securing shareholder approval, from filing MGT-14 and PAS-3 to maintaining SH-6 registers, every step under the Companies Act must be followed precisely.
Done right, ESOPs serve as a bridge between founders and employees — turning talent into long-term partners in growth. As India’s startup ecosystem matures, companies that manage their ESOP compliance with accuracy and transparency will stand out during investor evaluations and valuations.
(You may also like our recent post on [How to File ESOP Allotment Forms on MCA V3 Portal – Avoiding Common Errors in 2025].)
About the Author
Prashant Kumar is a Company Secretary, Published Author, and Partner at Eclectic Legal, a full-service Indian law firm advising on corporate, regulatory, and transactional matters. He specialises in corporate governance, ESOP structuring, and compliance advisory, helping startups and private companies design ownership strategies that are legally robust and investor-ready. He can be reached at prashant@eclecticlegal.com or +91-9821008011.
