# ESOPs — Employee Stock Option Plans

## Statutory Source

Section 62(1)(b) — empowers a company to issue further shares to its employees under a scheme of ESOP.
Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 — provides detailed conditions.

## Resolution Required

Unlisted Companies: Special Resolution (SR) of members.
Listed Companies: Governed by SEBI Regulations (SR + SEBI compliance).
For Private Companies — Ordinary Resolution (OR) is sufficient (as per MCA notification).

## Definition of 'Employee' (Rule 12)

### Who is an Employee?

1. A permanent employee of the company working in India or outside India.

2. A Director of the company (whole-time or part-time, but excluding Independent Director).

3. An employee/director of a subsidiary, holding, or associate company (in or outside India).

### Who is Excluded?

1. An employee who is a promoter or belongs to the promoter group.

2. A director who, by himself or together with relatives, holds more than 10% of the equity shares of the company (directly or indirectly).

### Special Exemption for Startup Companies

The above two exclusions do not apply to a startup company for a period of 10 years from its date of incorporation. Hence, startups may grant ESOPs to promoters and 10%+ shareholders.

## Freedom Given to the Company

The company has the freedom to determine:

Exercise price
Lock-in period
Vesting period (minimum 1 year between grant and vesting)

## Nature of the Option

No voting rights attached till conversion into shares.
No dividend till conversion.
Non-transferable — cannot be pledged, hypothecated, mortgaged or otherwise alienated.

## Vesting on Specific Events

Event	Treatment
Death of employee (Amar case)	All options vest immediately on that day in the hands of the nominee/legal heirs.
Permanent incapacity (Akbar case)	All options vest on that day in the hands of such employee.
Resignation or termination (Anthony case)	Unvested options expire / lapse on that day.

## Special Note on Amalgamation

In case of amalgamation, the period for which the option was held in the prior (transferor) company shall be set off / counted while computing the vesting period in the new entity.

Worked example

### Example 1

Example 1 (Permanent Employee): Mr. X is a permanent employee of ABC Ltd. working in its London branch. He is eligible for ESOPs as 'permanent employee' includes those working outside India.

### Example 2

Example 2 (Independent Director): Mr. Y is an Independent Director of ABC Ltd. He is NOT eligible for ESOPs because Independent Directors are expressly excluded.

### Example 3

Example 3 (Death): Mr. Z, an employee, holds 5,000 unvested options. He dies on 1.4.2026. All 5,000 options immediately vest on that day in the hands of his nominee.

### Example 4

Example 4 (Resignation): Mr. W resigns on 1.4.2026. His 10,000 unvested options lapse / expire on that day. (Only vested options would survive as per scheme terms.)

### Example 5

Example 5 (Startup): A startup, incorporated on 1.1.2025, may grant ESOPs to its promoter Mr. P even though normally promoters are excluded — the 10-year exemption period runs till 1.1.2035.

⚠️ Common exam mistakes

Treating Independent Directors as eligible for ESOPs — they are expressly excluded.
Granting ESOPs to a director holding >10% equity in a non-startup company — this is prohibited.
Forgetting that a minimum 1-year vesting period is statutorily required.
Allowing transfer / pledge of options — options are strictly non-transferable.
Treating private companies as needing SR — only Ordinary Resolution is required for private companies (post 2015 notification).
On resignation: assuming options continue to vest — unvested options lapse on the date of resignation/termination.
Forgetting the 10-year startup carve-out from the promoter/10% exclusions.

Bare-Act text Section 62(1)(b) · Companies Act, 2013 read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 · click to expand

Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares may be offered to employees under a scheme of employees' stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed.

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Employee Stock Option Plans (ESOPs) — Section 62(1)(b) read with Rule 12

Worked example

⚠️ Common exam mistakes