Can Unexercised ESOPs Be Bought Back under Section 68? Position of Former Employees

Summary: A former employee holding vested but unexercised Employee Stock Options (ESOPs) may face uncertainty when the company announces a buy-back. Section 68 of the Companies Act, 2013 expressly includes employees’ stock options within the definition of “specified securities” under Explanation I. However, Section 68(2)(e) requires securities proposed to be bought back to be fully paid-up, while Section 68(5)(c) refers to securities issued to employees under stock-option or sweat-equity schemes. These provisions create an interpretive question about whether an unexercised option itself can be purchased through a statutory buy-back. The distinction between vested options and issued shares is fundamental. Vesting establishes eligibility to exercise an option subject to the scheme, but does not automatically confer shareholder status. Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 regulates the treatment of options following resignation or termination and restricts their transfer and alienation. The Company Law Committee’s March 2022 recommendation to clarify that only exercised stock options may be bought back further highlights the uncertainty, although the recommendation itself does not amend the law.

Brief

A former employee has vested options but never exercised them. The company announces a buy-back. Can the former employee participate?

The Companies Act, 2013 does not give a straight answer. Explanation I to Section 68 includes employees’ stock options in “specified securities”. But Section 68(2)(e) requires the securities proposed to be bought back to be fully paid-up. Section 68(5)(c) refers to securities issued to employees under a stock-option or sweat-equity scheme. Read together, these provisions leave an interpretive question.

The distinction matters. A former employee who has exercised their options and holds issued shares is in a different position from one who holds only unexercised options. The question here is whether the unexercised options themselves can be included in a statutory buy-back.

The Company Law Committee recommended in 2022 that the words “which have been exercised” be inserted after “stock option” in Explanation I. That recommendation highlights the issue but does not resolve it. The answer is qualified: the express inclusion of stock options supports an argument for possible inclusion but does not establish that every former employee holding vested, unexercised options can participate.

1. Introduction

Start with the facts. An employee gets ESOPs. They vest. Before exercising, the employee resigns. Later, the company proposes a buy-back. The former employee wants in. The company isn’t sure. The statute doesn’t spell it out.

The key distinction is between a vested option and an issued share. Vesting means the employee has met the conditions. It doesn’t mean shares have been issued. Under Rule 12(8)(f) of the Companies (Share Capital and Debentures) Rules, 2014, unvested options lapse on resignation or termination. Vested options may be exercised within the specified period, subject to the scheme. ¹

Then comes Section 68. It allows a company to buy back its own shares or other specified securities, subject to conditions. Explanation I includes employees’ stock options in “specified securities”. Section 68(2)(e) requires the securities to be fully paid-up. Section 68(5)(c) refers to securities issued to employees under a stock-option or sweat-equity scheme. ^{2 3}

The difficulty is reconciling these provisions. Explanation I expressly includes employees’ stock options, while the other provisions raise questions about whether an unexercised option can itself be purchased in a buy-back. The Company Law Committee addressed this issue in March 2022 and recommended adding “which have been exercised” after “stock option” in Explanation I.⁴ That recommendation is not law. It highlights the interpretive difficulty, but does not settle how the existing provision should be read.

2. The Statutory Framework under Section 68

Section 68(1) lets a company buy back its shares or other specified securities. But it imposes conditions relating to authorisation, limits, sources of funds, and fully paid-up status. Section 68(2)(e) requires the securities proposed to be bought back to be fully paid-up.²

Three provisions matter most.

First, Explanation I to Section 68 says “specified securities” includes employees’ stock options and other securities notified by the Central Government.² That is the basis for arguing that stock options fall within the statutory buy-back framework.

Second, Section 68(5)(a) allows a buy-back from existing shareholders or security holders on a proportionate basis. Section 68(5)(c) separately addresses a buy-back by purchasing securities issued to employees under a stock-option or sweat-equity scheme.³ This shows that employee-related securities are contemplated by the provision.

The difficulty lies in how these provisions operate together. Explanation I expressly includes employees’ stock options within “specified securities”, but Section 68(2)(e) requires all shares or other specified securities proposed to be bought back to be fully paid-up. Section 68(5)(c), in turn, refers to securities issued to employees under a stock-option or sweat-equity scheme.^{2 3}

The broader reading gives effect to the express reference to stock options. The narrower reading questions whether an unexercised option can satisfy the fully paid-up requirement and whether it falls within the reference to securities issued to employees. The Act does not expressly explain how these provisions apply to an unexercised option. The issue is therefore one of statutory interpretation, rather than a question that can be resolved by relying on Explanation I alone.

The inclusion of stock options in the definition of “specified securities” does not, by itself, establish that an unexercised option satisfies the separate conditions for a buy-back under Section 68.

3. The Company Law Committee’s Proposed Clarification

The Company Law Committee looked at this in its March 2022 report. Paragraph 6.7, page 27, recommended amending Explanation I to Section 68 by inserting “which have been exercised” after “stock option”.⁴

The recommendation is relevant because it would expressly distinguish stock options from options that have been exercised. It supports the view that the existing wording warrants clarification. But it does not establish how a court would interpret the provision, or prove that the existing law necessarily includes or excludes unexercised options.

The Corporate Laws (Amendment) Bill, 2026 was introduced in the Lok Sabha on 23 March 2026, and the Joint Parliamentary Committee presented its report on 3 August 2026.⁵ The PRS legislative tracker lists the Bill as being in committee. Before publication, the Bill’s status should be verified against the latest official parliamentary records and the Gazette. The Bill’s introduction and the Committee’s report do not, by themselves, amend Section 68. The applicable law is the provision in force on the relevant date.

4. How Should Vested but Unexercised Options Be Treated?

There are two plausible readings. Neither is perfect.

4.1 Reading That Supports Possible Inclusion

Explanation I, expressly includes employees’ stock options within “specified securities”. That wording supports an argument that stock options should not be excluded from the Section 68 framework merely because they have not been exercised. Section 68(5)(c), which addresses securities issued to employees under stock-option or sweat-equity schemes, also shows that employee-related securities are contemplated by the buy-back provision.^{2 3}

However, inclusion within the definition does not necessarily establish eligibility for every form of buy-back. Section 68(2)(e) requires the securities proposed to be bought back to be fully paid-up, and Section 68(5)(c) refers to securities issued to employees. The Act does not expressly explain how those requirements apply when the proposed subject of the transaction is an unexercised option. The Company Law Committee’s recommendation to add the words “which have been exercised” highlights this drafting issue, but does not resolve the meaning of the existing text.⁴

4.2 Reading That Requires a Distinction Between Options and Issued Shares

The narrower reading emphasises that an unexercised option is a right to acquire shares, not an issued share. Vesting does not itself result in allotment. A company proposing to buy back shares issued following exercise is therefore dealing with a different instrument from a company proposing to purchase the option itself.

Rule 12 adds a separate complication for companies within its scope. Rule 12(8)(a) restricts the transfer of options, while Rule 12(8)(b) restricts their pledge, hypothecation, mortgage, alienation or encumbrance. Rule 12(8)(c) also restricts who may exercise an option, subject to the applicable exceptions.¹ These restrictions make it unsafe to assume that a company can simply purchase an unexercised option from a former employee. For companies governed by Rule 12, the prohibition on alienation creates an additional obstacle to purchasing the unexercised option itself. Any argument for such a transaction would need to explain how it can be reconciled with that restriction.

The scope of those restrictions and their interaction with Section 68 must be assessed under the applicable legal framework and scheme documents. They do not, on their own, settle every possible transaction structure. The stronger conclusion is a limited one: Explanation I provides a basis for arguing that stock options fall within the statutory framework, but the fully paid-up requirement, the reference to securities issued to employees, and the applicable ESOP restrictions leave the eligibility of unexercised options unresolved.

5. The Former Employee’s Rights under the Applicable ESOP Framework

Vesting and exercisability are different. Vesting means the employee has met the conditions. It does not mean shares have been issued.

First, identify the applicable framework. Rule 12 applies within its defined scope, including companies other than listed companies that are not required to comply with the SEBI employee-benefit framework.¹ Listed companies must be examined under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.⁶ The two frameworks should not be treated as interchangeable.

For a company governed by Rule 12, the scheme must address how long vested options can be exercised after resignation or termination. Rule 12(8)(f) provides for unvested options to lapse on resignation or termination, while vested options may be exercised within the specified period, subject to the scheme and the applicable rule.¹ Rule 12(6)(c) provides that employees do not receive shareholder benefits until shares are issued on exercise.¹

A former employee should check:

• Did the options vest before employment ended?
• Do they remain exercisable after resignation or termination?
• What is the exercise period and price?
• Are any conditions still outstanding?
• Have the options lapsed, been cancelled, or otherwise been dealt with under the scheme?

These questions determine the former employee’s position under the scheme, but they do not independently establish eligibility for a Section 68 buy-back. A purchase of an unexercised option, a purchase of shares after exercise, and a separate contractual liquidity arrangement are different transactions. Each must be assessed under the rules applicable to the instrument and transaction concerned.

6. The Relevance of Rule 17 and the SEBI Regulations

Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014 sets out requirements for buy-backs by private companies and unlisted public companies within its scope. It covers disclosures in the explanatory statement, information about the buy-back and its price, and related procedure.⁷

Rule 17 governs procedure. It does not expressly resolve whether an unexercised ESOP is eligible to be bought back. Compliance with Rule 17 does not, by itself, settle the interpretation of Section 68 or overcome restrictions that apply to the option under the relevant ESOP framework.

For listed companies, the SEBI (Buy-Back of Securities) Regulations, 2018 also apply. SEBI’s official listing identifies those regulations as last amended on 6 July 2026.⁸ Listed companies must also consider the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, last amended on 4 December 2025.⁶ The operative provisions of both frameworks should be checked against the proposed transaction.

These frameworks do different things. The buy-back regulations govern the company’s buy-back, while the employee-benefit regulations govern the ESOP framework for companies within their scope. Compliance with the buy-back rules does not automatically mean that an unexercised option can be purchased.

The analysis depends on the company’s listing status, the applicable employee-benefit framework, the nature of the instrument proposed to be purchased, and the structure of the transaction.

7. What Does the Judicial Position Establish?

In Waterfield Advisors Private Limited v. Sridhar Kurpad, Commercial Arbitration Petition No. 1149 of 2025, 2026:BHC-OS:17479, decided on 5 August 2026, the Bombay High Court dismissed a company’s challenge to an arbitral award directing it to allot 31,878 shares to a former employee. The employee’s appointment letter provided for equity linked to his employment, and a later grant letter specified his entitlement to the shares. The company refused to allot them after his employment ended.⁹

The Court considered whether the employee’s entitlement had vested before his departure and whether his failure to exercise the option defeated that entitlement. It examined the appointment letter and grant letter together, including the provisions dealing with termination and vesting. The Court also considered the company’s argument that the arrangement did not comply with Section 62 of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.⁹

The Court held that, in the circumstances of the case, the company could not rely on its own failure to frame an ESOP scheme to deny the employee the equity promised as part of his remuneration. It also found no sufficient basis to interfere with the arbitral tribunal’s conclusion that the employee’s failure to exercise the option did not defeat his claim. The Court’s decision turned on the wording of the documents, the findings of the arbitral tribunal, and the limited grounds on which an arbitral award can be set aside under Section 34 of the Arbitration and Conciliation Act, 1996.⁹

The judgment is relevant because it cautions against assuming that the end of employment or the mere non-exercise of an option necessarily extinguishes a former employee’s equity-related claim. The grant documents, the terms governing vesting, the company’s conduct, and the applicable legal framework may all matter.

But the distinction between contractual entitlement and statutory buy-back eligibility remains important. Waterfield Advisors concerned a challenge to an arbitral award directing allotment of shares. It did not decide whether a vested but unexercised option can itself be purchased in a buy-back under Section 68 of the Companies Act, 2013. The judgment therefore supports a limited proposition about former employees’ equity rights; it does not establish an entitlement to participate in a Section 68 buy-back. That question must be analysed separately under Section 68 and the applicable ESOP framework.⁹

8. A Practical Approach for Companies and Former Employees

For companies, the first step is to identify exactly what is proposed to be purchased: issued shares, unexercised options, or a separate contractual right. Review the ESOP scheme, grant documents, and exercise records to establish the legal nature and status of each instrument.

Next, assess the proposed transaction under Section 68, including the fully paid-up requirement and the applicable buy-back route.² For private companies and unlisted public companies, check Rule 17’s procedural requirements.⁷ For listed companies, review the SEBI buy-back regulations and employee-benefit regulations.^{6 8}

If the proposal is to purchase unexercised options directly, the company should examine the applicable transfer and alienation restrictions. It should not assume that the statutory definition of “specified securities” overrides those restrictions.

For former employees, vesting alone does not establish a right to buy-back consideration. Check whether the options remain exercisable, whether shares have been issued, and whether the scheme or transaction documents provide any relevant rights.

Before proceeding, the company should distinguish between a statutory buy-back of eligible securities and any separate contractual liquidity arrangement. The legal requirements for one should not be assumed to apply to the other.

9. Conclusion

Section 68 of the Companies Act, 2013 creates a genuine interpretive question for vested but unexercised ESOPs. Explanation I expressly includes employees’ stock options in “specified securities”. Section 68(2)(e) requires the securities proposed to be bought back to be fully paid-up, while Section 68(5)(c) refers to securities issued to employees under stock-option or sweat-equity schemes.²

The Company Law Committee’s 2022 recommendation to insert “which have been exercised” into Explanation I highlights the need to distinguish options from exercised options. But a committee recommendation is not an amendment. The law in force at the time of the transaction must be checked.⁴

The applicable ESOP framework adds another layer. Rule 12 restricts the transfer and alienation of options for companies within its scope, while listed companies must consider the relevant SEBI employee-benefit framework.^{1 6} Rule 17 and the SEBI buy-back regulations govern procedural and regulatory requirements, but do not by themselves resolve whether an unexercised option can be purchased.^{7 8}

The answer is therefore qualified. The express inclusion of employees’ stock options in Explanation I gives a basis to argue that they fall within the statutory framework. It does not conclusively establish that a former employee holding vested, unexercised options can participate in a Section 68 buy-back by having those options purchased. The result depends on the applicable law, the nature of the instrument, the ESOP scheme, the restrictions of the applicable ESOP framework, and the structure of the transaction. A former employee who already holds issued shares presents a different question from one who holds only unexercised options.

References

¹ Companies (Share Capital and Debentures) Rules, 2014, Rule 12, particularly Rule 12(2)(l), Rule 12(6)(c) and Rule 12(8)(a)–(f). See the official text available through India Code: Companies (Share Capital and Debentures) Rules, 2014. Rule 12 applies within its defined scope; listed-company schemes must be examined under the applicable SEBI framework.

² Companies Act, 2013, Section 68(1), Section 68(2)(e) and Explanation I to Section 68. Official Act repository: India Code – Companies Act, 2013.

³ Companies Act, 2013, Section 68(5)(a) and Section 68(5)(c). See also Buy-Back of Securities / Shares under Companies Act, 2013.

⁴ Company Law Committee, Report of the Company Law Committee (March 2022), para. 6.7, p. 27: Report of the Company Law Committee (PDF).

⁵ PRS Legislative Research, The Corporate Laws (Amendment) Bill, 2026, legislative tracker and Joint Parliamentary Committee report information: Corporate Laws (Amendment) Bill, 2026. The Bill’s status should be checked against official parliamentary records and the Gazette immediately before publication.

⁶ Securities and Exchange Board of India, Share Based Employee Benefits and Sweat Equity Regulations, 2021, last amended on 4 December 2025: SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.

⁷ Companies (Share Capital and Debentures) Rules, 2014, Rule 17, “Buy-back of shares or other securities”, applicable to private companies and unlisted public companies within its scope. Text: Rule 17 – Buy-back of Shares or Other Securities.

⁸ Securities and Exchange Board of India, Buy-Back of Securities Regulations, 2018, last amended on 6 July 2026: SEBI (Buy-Back of Securities) Regulations, 2018.

⁹ Waterfield Advisors Private Limited v. Sridhar Kurpad, Commercial Arbitration Petition No. 1149 of 2025, 2026:BHC-OS:17479 (Bombay High Court, 5 August 2026): Full Judgment – Indian Kanoon. The judgment concerns a contractual share-entitlement dispute and should not be cited as directly deciding the Section 68 buy-back question.