To issue ESOPs in a private limited company, you draft an ESOP scheme, get the shareholders to approve it by special resolution, and file MGT-14 with the Registrar within 30 days. You then grant options to eligible employees, who hold them through a vesting period of at least one year before they can exercise. On exercise the employee pays the exercise price, the company allots the shares and files PAS-3. The framework sits in Section 62(1)(b) of the Companies Act and Rule 12 of the Share Capital and Debentures Rules.
| Governing provision | Section 62(1)(b), Companies Act 2013; Rule 12 |
|---|---|
| Approval needed | Special resolution of shareholders |
| Key MCA filings | MGT-14 (scheme), PAS-3 (on exercise) |
| Minimum vesting | One year between grant and vesting |
| Register | Register of Employee Stock Options (Form SH-6) |
What an ESOP is
An Employee Stock Option Plan gives an employee the right, but not the obligation, to buy a set number of shares in the company at a price fixed today. The employee earns that right over time through vesting, and pays the exercise price only if and when they choose to exercise. It is the standard way an unlisted company shares ownership with the people building it, without paying cash.
The step-by-step process
- Draft the ESOP scheme. Decide the pool size, who is eligible, the exercise price, the vesting schedule and the exercise window. This document is the rulebook for every grant that follows.
- Get shareholder approval. A private company issues ESOPs under Section 62(1)(b), which requires a special resolution of the shareholders approving the scheme.
- File MGT-14. The special resolution is filed with the Registrar in Form MGT-14 within 30 days of being passed.
- Grant options. Issue grant letters to the selected employees, recording the number of options, the exercise price and the vesting schedule.
- Vesting. Options vest over the agreed period. The law requires a minimum gap of one year between the grant of an option and its vesting.
- Exercise and allotment. When a vested employee exercises, they pay the exercise price, the company allots the shares, issues share certificates, and files PAS-3 for the allotment.
- Maintain the register. Keep the Register of Employee Stock Options in Form SH-6, updated for every grant, vesting and exercise.
Who can receive ESOPs
Rule 12 defines who counts as an eligible “employee”: a permanent employee of the company working in India or abroad, and a director, whether whole-time or not. Independent directors are excluded.
There is an important restriction for an ordinary private company: promoters, and directors who hold more than 10 percent of the equity, cannot be given ESOPs. The exception matters for startups. A company recognised as a startup by DPIIT can grant ESOPs to promoters and to more-than-10-percent directors for up to ten years from incorporation. If your founders want to be inside the ESOP pool, that recognition is what makes it possible.
How ESOPs are taxed
Tax hits the employee at two points. At exercise, the difference between the fair value of the share and the exercise price is treated as a perquisite and taxed as salary income. At sale, any gain over the value already taxed at exercise is taxed as capital gains. Eligible startups have a deferral that pushes the perquisite tax point later, which is worth checking if your company qualifies. The company should plan grants knowing the employee will face a tax event on exercise.
Common mistakes
- Granting options before the scheme is approved. Informal promises of equity, made before the special resolution, leave grants on shaky ground. Approve the scheme first.
- Missing the MGT-14 filing. The special resolution must reach the Registrar within 30 days.
- Putting promoters in the pool without startup recognition. For an ordinary private company this is not allowed.
- Not maintaining the SH-6 register. A clean options register is exactly what an investor’s due diligence will ask to see.
Frequently asked questions
Can a private limited company issue ESOPs?
Yes. A private company issues ESOPs under Section 62(1)(b) of the Companies Act, with the scheme approved by a special resolution of the shareholders and the resolution filed in MGT-14 within 30 days.
What approval is needed to issue ESOPs?
A special resolution of the shareholders approving the ESOP scheme. The resolution is then filed with the Registrar in Form MGT-14.
Can founders or promoters receive ESOPs?
In an ordinary private company, no — promoters and directors holding more than 10 percent equity are excluded. A DPIIT-recognised startup can grant ESOPs to them for up to ten years from incorporation.
Is there a minimum vesting period for ESOPs?
Yes. There must be a minimum gap of one year between the grant of an option and the date it vests.
When is an employee taxed on an ESOP?
At exercise, the gap between fair value and exercise price is taxed as a salary perquisite; at sale, any further gain is taxed as capital gains. Eligible startups have a deferral on the exercise-stage tax.
Reviewed by CS Sapna Malpani, a practising Company Secretary in Bangalore who sets up ESOP schemes for startups and growing companies. This is general information, not legal advice. About Sapna Malpani.
Last reviewed: May 2026.