# Vesting of ESOP Options – Special Situations

When an employee who has been granted Employee Stock Options (ESOPs) leaves the company before completing the vesting period, the treatment of unvested options depends on the reason for cessation of employment.

## The Three Situations

Situation	Effect on Unvested Options	In Whose Hands Do They Vest?
Death of employee	All unvested options vest immediately on the date of death	Legal heirs / nominees of the deceased employee
Permanent incapacity (while in employment)	All unvested options vest immediately on the date of incapacity	The employee himself/herself
Resignation or Termination	All unvested options expire/lapse on that day	Nobody – the options are lost

## Key Points to Remember

On death and permanent incapacity, the vesting period is accelerated – the employee/heirs do not need to wait for the original schedule.
On resignation or termination, only options that have already vested before that date may be exercised (as per the company's scheme); the unvested ones simply lapse.
Already-vested options held by the employee at the time of death pass to nominees/heirs.

## Special Rule: Amalgamation

In case the company in which the employee held ESOPs gets amalgamated with another company, the period for which the option was held in the transferor (prior) company is to be adjusted / set off while computing the minimum vesting period in the amalgamated company.

> Example: If minimum vesting period is 1 year, and the employee held options for 8 months in Company A before amalgamation, only 4 more months of holding will be needed in Company B (the amalgamated company).

Worked example

### Example 1

Example 1 – Death: Mr. Amaul was granted 1,000 ESOPs on 1 April 2024 with a vesting period of 3 years. He dies in a road accident on 15 June 2025. All 1,000 unvested options vest immediately on 15 June 2025 in the hands of his nominee/legal heirs.

### Example 2

Example 2 – Permanent Incapacity: Mr. Akbar was granted 2,000 ESOPs, of which 500 had already vested. He suffers permanent paralysis. The remaining 1,500 unvested options vest immediately in his own hands on the date the incapacity is established.

### Example 3

Example 3 – Resignation: Mr. Anthony resigns on 30 May 2026 with 800 unvested options. These 800 options expire on the date of resignation. Only options that had already vested before that date can be exercised by him within the period allowed in the scheme.

### Example 4

Example 4 – Amalgamation: Mr. X held ESOPs in Company P for 10 months. Company P amalgamates with Company Q. The 10-month period in Company P is set off, so the balance vesting period continues in Company Q.

⚠️ Common exam mistakes

Confusing 'death' and 'resignation' – students often write that options lapse on death; in fact they vest with heirs.
Forgetting that on permanent incapacity the options vest with the employee personally, not with nominees.
Assuming vesting period restarts after amalgamation – the prior holding period is to be set off/adjusted.
Mixing up 'vested but unexercised' options (which can be exercised by heirs) with 'unvested' options (which get accelerated).

Reference: Section 62(1)(b) / Rule 12 of SH&D Rules, 2014 — Companies Act, 2013 – Section 62(1)(b) read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 (ESOP provisions)

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ESOP – Vesting of Options on Death, Incapacity, Resignation or Termination

Worked example

⚠️ Common exam mistakes