How is an Employee Stock Option Scheme structured for a private limited company?

Question

My startup wants to give employees stock options and I want to know the legal process for setting up an ESOP scheme. Specifically, I want to know how Companies Act 2013, Section 62 applies to a situation like mine and what the corporate law position in India actually is. If there is a deadline I should be aware of, I need to know that now.

MyVakeel Legal Desk · Accepted Answer

How is an Employee Stock Option Scheme structured for a private limited company? is governed in India primarily by Companies Act 2013, Section 62, Companies (Share Capital and Debentures) Rules 2014, Rule 12 and Income Tax Act 1961, Section 17(2). Outcomes in esop companies act disputes depend heavily on documentation, so check what you can actually evidence as you read.

Section 62(1)(b) permits a company to issue shares to employees under an employee stock option scheme by passing a special resolution, treating it as an exception to the rights issue requirement.

Rule 12 of the Share Capital and Debentures Rules requires the ESOP scheme to be approved by shareholders and prescribes a minimum one-year vesting period from the date of grant of options before they can be exercised.

The scheme must specify the exercise price, vesting conditions, lock-in period and treatment of options on resignation, termination or death of the employee.

Under Section 17(2) of the Income Tax Act 1961, the difference between the fair market value and exercise price of shares allotted on exercise of options is taxed as a perquisite in the employee's hands.

Promoter directors and directors holding more than 10 percent equity are generally not eligible to receive ESOPs in an unlisted company under the applicable rules.

What to do next: 1) Draft the ESOP scheme specifying pool size, vesting and exercise terms; 2) Obtain shareholder approval by special resolution for the scheme; 3) Grant options through a compensation committee or the board as authorised; 4) Allot shares on exercise and file Form PAS-3 with the Registrar.

If you are unsure whether your facts fall inside Companies Act 2013, Section 62, that is worth checking with an advocate before you commit to a route, because switching later costs time. You can post the details on the MyVakeel forum for a practising advocate to review, or book a paid consultation with a Bar Council verified lawyer in corporate law.