CS Vikas Gupta

CS VIKAS GUPTAESOP are very useful for companies at the growing stage to attract good employees. As the high growth employers are utilizing most of the funds for sustaining the growth, they don’t have many resources to distribute to the employees and hence may be considered as with low paying ability. They can then use ESOP to retain good employees as there is no cash outlay involved for the company. The basic purpose of ESOP for many companies is to provide employee benefits or incentives as they believe that by increased employee participation with them perceiving themselves as owners and more involved with the company, it will lead to a positive increase in their dedication to the company, improve work effort, reduce turnover and generally bring a more harmonious atmosphere to the company. All these in turn lead to improved profitability and a win – win situation for all concerned.


(i) Employees’ stock option

As per Section 2(37) of the Companies Act, 2013Employees’ 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.

(ii) Employee

As per Explanation to Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 ‘‘Employee’’ means-

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

(b) 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-

(i) an employee who is a promoter or a person belonging to the promoter group; or

(ii) 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.


Section 62(1)(b) of the Companies Act, 2013 provides that 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 (ordinary resolution in case of private company) passed by company and subject to such conditions as may be prescribed.

Procedure for issue of ESOP in unlisted company:

1. Draft the ESOP scheme.

2. Convene the Board Meeting and pass the scheme.

3. Call the general meeting to approve the scheme by Shareholders. The following disclosure will be made 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 standards.

4. Approve the ESOP Scheme by passing a special resolution (ordinary resolution in case of Private Company). The approval of shareholders by way of separate resolution shall be obtained by the company in case of-

(a) grant of option to employees of subsidiary or holding company; or

(b) 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.

5. File form MGT-14 to submit the special resolution within 30 days of passing the resolution.

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

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

8. Exercise of Options by the employees;

9. Allotment of Shares. As and when options are exercised file form PAS-3 (Return of Allotment) with ROC.

10. The company shall maintain a Register of Employee Stock Options in form SH-6 and shall forthwith enter therein the particulars of option granted.

11. 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;

(For any query or question or suggestions Author can be reached at Mob. +91-9717755479, E-mail: [email protected])

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  1. Jay says:

    In case of Private Limited Companies, the type of EGM resolution for ESOP is Ordinary Resolution. Is Expl statement mandatory for the said Ordinary Resolution?. Thanks

  2. Jay says:

    Is Explanatory Statement required to be annexed to the EGM Notice being convened by a Private Limited for passing an ordinary resolution for ESOP. Thansk

  3. Preeti says:

    For unlisted public company can ESOP be granted at different exercise price and vary vesting period to different employees as well as same employee at the same Board meeting.
    Also for issue of ESOP is it mandatory to obtain a CA valuation report at the time of grant of options

  4. Smruti kini says:

    I want to know whether for Equity settled Stock appreciation rights (SAR) this same procedure is followed. Since companies act is silent on this aspect. My company is an unlisted public company and wants to issue equity shares to employees under SAR scheme.

  5. Saket Agarwal says:

    The exclusion part in the definition of “Employee” as given in Explanation to Rule 12 of the Companies (Share Capital and Debenture) Rules applies to only clause (c) of the definition as it is mentioned along with clause (c) itself. However, in your article you have entered the same in the next line giving an impression that it applies to clauses (a) and (b) as well. I have cross checked with the Rules available on MCA as well as other sites. The exclusion is appearing as a part of clause (c) only.

    1. Vikas Gupta says:

      Yes you are right Saket. It just an error of formatting, But you can see it doesn’t affect the exclusion part because in clause c itself also both a and b covered.

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January 2021