Checklist for issue of ESOP by private company

As per 2(37) ’employees stock option’ means the option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price.

Process of issue:

1. Drafting of ESOP scheme.

2. Alter the Article of Association, if AOA is silent on the issue of share to employees under the scheme of ESOP.

3. Alter the Memorandum of Association, if the MOA does not have the adequate authorized share capital.

4. Convene the Board Meeting of the company and following action shall be taken are as follows:

  • Approve the ESOP scheme
  • Approve the altered AOA and MOA subject to approval by members in the Extra- Ordinary General Meeting (EGM).
  • Approve the draft notice of the EGM.
  • Authorize any person to send the notice of the Extra-Ordinary General Meeting to all the members of the company.


5. The company shall make the following disclosures in the explanatory statement annexed to the notice for passing of the resolution-

 a) the total number of stock options to be granted;

 b) identification of classes of employees entitled to participate in the Employees Stock Option Scheme;

 c) the appraisal process for determining the eligibility of employees to the Employees Stock Option Scheme;

d) the requirements of vesting and period of vesting;

e) the maximum period within which the options shall be vested;

f) the exercise price or the formula for arriving at the same;

g) the exercise period and process of exercise;

h) the Lock-in period, if any ;

i) the maximum number of options to be granted per employee and in aggregate;

j) the method which the company shall use to value its options;

k) the conditions under which option vested in employees may lapse e.g. in case of termination of employment for misconduct;

l) the specified time period within which the employee shall exercise the vested options in the event of a proposed termination of employment or resignation of employee; and

m) a statement to  the  effect  that  the  company  shall  comply  with  the  applicable accounting standar

6. Hold the Extra-Ordinary General Meeting and conduct the following business –

  • for issuing of Employees Stock Option Scheme by the shareholders of the company by passing an ordinary resolution.
  • for approving the altered MOA and AOA by the shareholders of the company by passing an special resolution.

7. The approval  of  shareholders  by way of  separate  resolution  shall  be  obtained  by  the company in case of –

i. grant of option to employees of subsidiary or holding company; or

ii. grant of option to identified employees, during any one year, equal to or exceeding one percent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of option.

8. File eform  MGT-14  to  submit the  special  resolution  within  30  days  of  passing  the resolution.

9. Granting of options to eligible employees*.

10. Vesting of options – a. There shall be a minimum period of one year between the grant of options and vesting of option.

11. Exercise of options by the employees – a. The company granting option to its employees pursuant to Employees Stock Option Scheme will have the freedom to determine the exercise price in conformity with the applicable accounting policies, if any. b. The company shall have the freedom to specify the lock-in period for the shares issued pursuant to exercise of option.

12. After approval of ESOP scheme by the shareholders, grant options to the eligible employees.

13. Allotment of Shares,  as  and  when  options  are  exercised  file  form  PAS-3  (Return  of Allotment) within 30 days from the allotment of shares, with ROC.

Other terms & conditions to be complied by the company are as follows-

14. The company may by special resolution, vary the terms of Employees Stock Option Scheme not yet exercised by the employees provided such variation is not prejudicial to the interests of the option holders and the notice for passing special resolution for variation of terms of Employees Stock Option Scheme shall disclose full of the variation, the rationale therefor, and the details of the employees who are beneficiaries of such variation.

15. The amount, if any, payable by the employees, at the time of grant of option-

a) may be forfeited by the company if the option is not exercised by the employees within the exercise period; or

b) the amount may be refunded to the employees if the options are not vested due to non- fulfillment of conditions relating to vesting of option as per the Employees Stock Option Scheme

16. The option granted to employees –

a) shall not be transferable to any other per

b) shall not be pledged, hypothecated, mortgaged or otherwise encumbered or alienated in any other manner.

17. Subject to point (18), no person other than the employees to whom the option is granted shall be entitled to exercise the option.

18. In the event of the death of employee while in employment, all the options granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.

19. The Board of directors, shall, inter alia, disclose in the Directors’ Report for the year, the following details of the Employees Stock Option Scheme:

a) options granted;

b) options vested;

c) options exercised;

d) the total number of shares arising as a result of exercise of option;

e) options lapsed;

f) the exercise price;

g) variation of terms of options;

h) money realized by exercise of options;

i) total number of options in force;

j) employee wise details of options granted to;-

i) key managerial personnel;

ii) any other employee who receives a grant of options in any one year of option amounting to five percent or more of options granted during that year.

iii) identified employees who were granted option, during any one year, equal to or exceeding one percent  of the issued  capital  (excluding outstanding warrants  and conversions) of the company at the time of grant;

20. The company shall maintain a Register of Employee Stock Options in Form No. SH.6 and shall forthwith enter therein the particulars of option granted under clause (b) of sub-section (1) of section 62.

21. The Register of Employee Stock Options shall be maintained at the registered office of the company or such other place as the Board may decide.

22. The entries in the register shall be authenticated by the company secretary of the company or by any other person authorized by the Board for the purpose.


* ‘‘Employee’’ means-

a. a permanent employee of the company who has been working in India or outside India;


a director  of  the  company,  whether  a  whole  time  director  or  not  but  excluding  an independent director; or

c. an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company.

but does not include-

1. an employee who is a promoter or a person belonging to the promoter group; or

2. a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.

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  1. Nidhi Parekh says:

    Hi.. had one query.. in a co there is ESOS scheme proposed so the promoter wants to carve out the ESOS shares to be issued from his own holdings so my question is how do I transfer shares and execute deed sh4 from the promoter to esos scheme? PL guide?

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January 2021