Is shareholder approval required for ESOP in a private company?

Yes. Under Section 62(1)(b) of the Companies Act 2013, an ESOP scheme requires shareholder approval by special resolution (75% majority). The resolution and explanatory statement must be filed in Form MGT-14.

How is ESOP taxed in India?

ESOPs trigger tax twice. At exercise, the difference between FMV and exercise price is taxed as salary perquisite (with TDS u/s 192). At sale of shares, the gain over FMV at exercise is taxed as capital gains. DPIIT startups can defer the exercise-stage perquisite tax up to 5 years.

What is a cliff in ESOP vesting?

A cliff is the minimum service period before any options vest — typically 12 months. If the employee leaves before the cliff, all unvested options are forfeited. After the cliff, options vest monthly or quarterly over the balance of the vesting schedule.

ESOP

Relevant for:For Startups For SMEs

ESOP Advisory — Employee Stock Option Plan Structuring for India

A well-designed ESOP attracts talent, aligns incentives and survives investor diligence. We design, document and operate ESOP schemes for Indian private companies and startups under Companies Act 2013 and SEBI SBEB Regulations 2021 (for listed companies).

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What's Included

ESOP scheme drafting — vesting, exercise, lock-in, forfeiture

Board and shareholder approvals (special resolution + MGT-14)

Grant letters and employee-wise option register

Registered valuer report for exercise price (Section 247)

ROC filings — PAS-3 on allotment, MGT-14 for scheme

Taxation guidance — perquisite at exercise, capital gains at sale

Annual ESOP disclosures in board report and financial statements

Our Process

STEP 1

Scheme Design

Pool size, vesting curve, eligibility and acceleration triggers.

Week 1

STEP 2

Approvals

Board resolution, EGM notice and special resolution + MGT-14.

Week 2–3

STEP 3

Grant

Issue grant letters, maintain option register and trackers.

Week 3

STEP 4

Exercise & Allotment

Valuation, exercise notice, PAS-3 and share certificate issuance.

On exercise

STEP 5

Ongoing Admin

Vesting tracking, exits, taxation and annual disclosures.

Ongoing

Documents Required

Memorandum and Articles of Association
Existing cap table and shareholder agreement
Board approval for ESOP pool size
List of eligible employees with grade and tenure
Audited financials for valuation report
Existing employment contracts and exit policy
Investor consent (if SHA requires it)

Key Statutory References

Item	Reference
Governing Section	Section 62(1)(b), Companies Act 2013
Listed Companies	SEBI (SBEB) Regulations, 2021
Valuation	Registered Valuer — Section 247
Approvals	Special Resolution + Form MGT-14
Allotment	Form PAS-3 within 30 days of exercise