The Founder's Guide to ESOP Compliance: SEBI, Companies Act & MCA Filings

ESOP compliance in India depends first on whether your company is listed. An unlisted company follows Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. A listed company follows SEBI's Share Based Employee Benefits and Sweat Equity Regulations, 2021. Both then file with the MCA, deduct tax when employees exercise and show the cost in their accounts. Most of the work falls at four moments: setting up the scheme, each grant, each exercise and the year end.

This guide works through those moments in order, with the form and the deadline for each.

Which ESOP rules apply to your company?

Three other sets of rules apply to every company that runs ESOPs:

• Income tax. The gain at exercise is taxed as salary, so the company deducts TDS through payroll.
• Accounting standards. The cost of options is an expense in the accounts, under Ind AS 102 or the ICAI Guidance Note on share-based payments.
• FEMA. Granting options to employees who live outside India needs reporting to the Reserve Bank of India through the company's bank.

Setting up an ESOP scheme

For an unlisted company, setting up a scheme takes five steps.

1. Draft the scheme. Rule 12 lists what it must settle. That includes the total number of options, who is eligible, the vesting requirements, the exercise price or its formula, the exercise period, the lapse conditions and the maximum options per employee.
2. Board approval. The board approves the scheme and calls a shareholders' meeting.
3. Notice to shareholders. The notice carries an explanatory statement that discloses the terms Rule 12 lists, and a statement that the company will follow the applicable accounting standards.
4. Shareholder approval. Rule 12 asks for a special resolution. Treelife notes that a private company with up-to-date filings can use a 2015 exemption to pass an ordinary resolution, but it recommends a special resolution in every case.
5. File and record. File MGT-14 within 30 days of the special resolution, and open the register of employee stock options in Form SH-6.

A public company must also file the board resolution itself in MGT-14. According to Treelife, a private company is generally exempt from filing it. The exemption holds as long as the company is not a subsidiary of a public company and is not in default of its annual filings.

Check authorised capital at the same time. If the shares that could be issued on exercise would exceed it, increase it by ordinary resolution and file SH-7 within 30 days.

Who can receive ESOPs under Rule 12

Rule 12 lets a company grant options to its permanent employees in India or abroad, its directors other than independent directors, and employees of its subsidiary or holding company. It leaves out promoters, the promoter group, and directors who hold more than 10% of the equity. A DPIIT-recognised startup is exempt from those two exclusions for up to 10 years from incorporation.

Two kinds of grant need their own shareholder resolution:

• grants to employees of a subsidiary or holding company
• grants to one person of 1% or more of the issued capital in a single year

The rules every scheme must follow

• At least one year between grant and vesting. On death or permanent incapacity, options vest at once.
• An exercise price at or above face value. Section 53 bars issuing shares at a discount.
• No transfers. Options cannot be transferred, pledged or mortgaged.
• No shareholder rights before exercise. Option holders get no dividend or vote until shares are issued.
• Leavers. Unvested options lapse when someone resigns or their job ends. Vested options can be exercised within the period the scheme sets.
• Changes. The terms of unexercised options can be varied only by special resolution, and only if the change does not hurt the option holders.

Every time you grant options

Each grant is a board or committee decision under the approved scheme. Then:

1. Send a grant letter that matches the scheme: the number of options, the exercise price in rupees, the vesting schedule and the exit window.
2. Enter the grant in the SH-6 register. Rule 12 asks for entries to be made promptly, authenticated by the company secretary or a person the board authorises.
3. Check for extra approvals: subsidiary employees, and grants of 1% or more to one person in a year.
4. Value the grant for the accounts. The expense is measured at the grant date and spread over the vesting period.
5. Report grants to employees outside India. See the FEMA section below.

Every time an employee exercises

An exercise turns options into shares, so it creates tax, allotment and filing work.

1. Value the shares. For an unlisted company, the fair market value comes from a SEBI-registered Category I merchant banker. Under the earlier tax rules, the valuation could be dated no more than 180 days before the exercise.
2. Deduct TDS. The fair market value minus the exercise price is a perquisite, taxed as salary. The company deducts TDS through payroll.
3. Apply the startup deferral, if you qualify. An eligible startup, with DPIIT recognition and an Inter-Ministerial Board certificate, deducts the tax later. It falls due within 14 days of the earliest of three dates: 60 months from the end of the tax year of allotment, the date the employee sells, or the date they leave.
4. Allot the shares. The board or an authorised committee allots them.
5. Issue in demat form, if Rule 9B applies. Private companies that are not small companies must issue securities only in dematerialised form, so the employee needs a demat account.
6. File PAS-3 within 30 days of the allotment.
7. Update the SH-6 register.

Every year

The board's report must disclose, for the year:

• options granted, vested, exercised and lapsed
• the number of shares issued on exercise
• the exercise price, and any change to the scheme's terms
• the money realised from exercises
• the total options in force
• employee-wise details for key managerial personnel, anyone granted 5% or more of the year's options, and anyone granted 1% or more of the issued capital

The ESOP expense also goes into the annual accounts. Ind AS 102 applies to listed companies, unlisted companies with a net worth of ₹250 crore or more, and their group companies. Other companies follow the ICAI Guidance Note on share-based payments, which recommends fair value but allows the intrinsic value method.

ESOPs for employees outside India

An Indian company can grant options to employees who live outside India under Rule 8 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. The scheme must follow the applicable law, the grant must fit within the sectoral cap for foreign investment, and citizens of Bangladesh or Pakistan need prior government approval. According to Treelife, the sectoral cap is tested on a fully diluted basis when the options are granted, not when they are exercised.

Two forms follow, both filed through the company's bank on the RBI's FIRMS portal:

• Form ESOP, within 30 days of granting the options.
• FC-GPR, within 30 days of allotting shares when the employee exercises.

A late filing can be regularised with a late submission fee. Treelife sets out the fee for these forms as ₹7,500 plus 0.025% of the amount involved for each year of delay.

Listed companies and SEBI

A listed company follows the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, in force since 13 August 2021. They cover employee stock option schemes, stock purchase schemes, stock appreciation rights, general employee benefit and retirement benefit schemes, and sweat equity. The main requirements:

• A compensation committee administers the scheme. The nomination and remuneration committee can act as it.
• Shareholders approve the scheme by special resolution before anything is offered.
• At least one year between grant and vesting, as under Rule 12.
• Stock exchange approval. The company files the scheme with the exchange and obtains in-principle approval before granting, and reports shares issued on each exercise.
• A certificate from the secretarial auditor, placed before shareholders at every annual general meeting, confirming that the scheme follows the regulations.
• Disclosures in the board's report, and detailed option data on the company's website.
• Trust limits. A trust that buys shares in the market for a scheme can acquire no more than 2% of the paid-up equity capital in a year. It can hold no more than 5% at any time.

Preparing for an IPO

When a company prepares to list, its ESOP records are checked as part of due diligence. Three rules matter most:

• Pre-IPO schemes. A scheme set up before listing must be brought in line with the SEBI regulations and ratified by shareholders after listing, before any fresh grants are made under it.
• Founders' ESOPs. Since September 2025, founders who are named as promoters in the draft IPO papers can keep ESOPs granted at least one year before those papers are filed. Once named as promoters, they cannot receive new grants.
• Clean records. Every grant, exercise and allotment should match the SH-6 register, the PAS-3 filings, the board's reports and the accounts. Gaps found at this stage take time to fix.

If you miss a filing

Missing a deadline usually means additional fees, and sometimes a penalty on the company and its officers.

• MGT-14. Section 117(2) sets a penalty of ₹10,000 plus ₹100 for each day of delay, up to ₹2 lakh for the company and ₹50,000 for each officer in default. In March 2026, the Registrar of Companies in Chennai fined Garuda Aerospace and two of its directors ₹52,700 each for two MGT-14 forms filed about five months late.
• PAS-3. Section 39(5) sets a penalty of ₹1,000 a day, up to ₹1 lakh, for the company and each officer in default. The late filing fee also rises with the delay, from twice the normal fee to twelve times.
• FEMA forms. A late Form ESOP or FC-GPR needs the late submission fee.

Who handles what

Caption: A typical split of ESOP compliance work in an Indian startup. Smaller companies often hand most of it to one company secretary.

This article is general information, not legal, tax or accounting advice. Speak to a company secretary, chartered accountant or lawyer before you set up or change an ESOP scheme.