ESOP can work wonders if you know how to make them work for your company, regardless of whether listed or unlisted. However, ESOPs work in different ways for both these company types. Let’s glance through both.

Employee Stock Option Plan, better known as ESOP in corporate parlance, refers to giving stock options to employees, coupled with an ownership interest in the company. Usually, startups experiment with ESOPs considering they are in the early growth stages and operate within a restricted budget. The company’s employees can buy its shares at a predetermined price.

How do ESOPs Work in Listed Companies?

In the case of listed companies, the ESOP scheme is termed the Employee Stock Purchase Scheme (ESPS). According to Rule 2 Sub Rule 4, companies can offer shares under ESPS only when they are listed. However, ESPS is a bit different from ESOP. ESPS does not provide a right but allows the respective company’s employees to buy the shares at a discounted price at a predetermined rate.

The discount could be as low as 15 percent from the market share price. Usually, shares in ESPS can be bought from the after-tax money the employees get. Another difference between ESOP and ESPS is that ESOP is a remuneration plan. However, on the other hand, ESPS involves employees contributing to the plan by accepting payroll deductions between the offer date and the purchase date, thus saving for the purchase.

As per SEBI guidelines, ESPS aspects include,

  • Share issuing procedure
  • The fundamental action of share purchase
  • Compliance
  • Resolutions
  • Eligibility
  • Board duties, etc. stay similar to the ESOP Scheme.

How do ESOPs Work in Unlisted Companies?

The Companies Act, 2013 and (Share Capital and Debenture) Rules state the provisions for offering an ESOP to employees of unlisted companies. Section 62 (1) (b) of the 2013 Act states that the company can create the ESOP scheme only according to a Special Resolution. Rule 12 of the (Share Capital and Debenture) Rules provides the procedure of creating such a scheme and the protocols to adhere to. Let’s quickly run through the procedure. For a detailed explanation, connect with Valuation India.

  • Recognizing Employees

As per Rule 12 of the (Share Capital and Debentures) Rules, 2014, private limited companies can only issue ESOPs to employees who are,

  • Permanent employees staying in or outside India
  • Directors of the company, irrespective of whether whole-time or not but excluding independent ones
  • Employees of a subsidiary or holding company staying in or outside India, except for a promoter or a director, who directly or indirectly holds over 10% of the equity shares


  • Special Resolution

After recognizing employees according to Rule 12, the company’s shareholders must approve ESOP through a special resolution in the general meeting. The company should also attach specific disclosures in the notice given for ESOP approval. Some of them include,

  • Total number of shares granted
  • Recognized classes of employees
  • Exercise date
  • Vesting period
  • Lock-in period
  • Vesting date
  • Exercise dates and periods in the event of termination, resignation, etc.
  • The maximum number of options to be given per employee.


  • Separate Resolution

The shareholder approval in the case of ESOP being given to a subsidiary or holding companies or ESOP equivalent to or exceeding 1% of the issuing capital being given to employees should be taken by the way of a separate resolution.

  • Compliance

Rule 12 imposes specific compliance like,

  • Maintaining an Employee Stock Options register in Form No. SH.6 and shall enter the particulars of option granted under Section 62 (1) (b) of the Act
  • Maintaining the above, the registered office of the company or such other place as the company’s BOD may decide.
  • The entries in the register will be authenticated by the company’s CS or by any other individual authorized by the BOD for this reason.


  • Other Duties

Rule 12 also ensures some other specific measures and guidelines that the company should follow.

  • Rule 12 Sub Rule 5: The company may modify or change specific ESOP terms by the way of a Special Resolution, provided such changes are fair to the employees.
  • Rule 12 Sub Rule 6: This rule enables the company to provide at least one year between the grant of options and the vesting period. It also allows the company to fix a lock-in period. Additionally, it states that no employee will be allowed a right to vote or receive any dividend on the stock options until shares are issued on the exercise of the option.
  • Rule 12 Sub Rule 7: This one speaks about the conditions in which the amount if any, paid by the employee can be refunded or forfeited.
  • Rule 12 Sub Rule 8: Under Rule 8, the transferability of such options to any other person is restricted. But upon the employee’s death, the legal heirs and nominees can exercise the right.
  • Rule 12 Sub Rule 9: It includes a few other aspects, in addition to the above-mentioned disclosures that have to be disclosed in the Director’s Report for the year by the BOD.

We hope this article proved insightful in knowing the essential aspects of issuing ESOPs for listed and unlisted companies. As mentioned earlier, to know more and for comprehensive hand-holding.

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