How to Grant ESOPs to Employees in India: Process, Approvals, and Records 

Key takeaways

• An ESOP grant awards a named employee a fixed number of stock options under an approved ESOP scheme. The employee becomes a shareholder only when vested options are exercised.
• Under Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, ESOPs can be granted to permanent employees and non-independent directors of the company, its subsidiary, or its holding company.
• Promoters and directors holding more than 10% of equity cannot receive ESOPs, except in a DPIIT-recognised startup for ten years from incorporation.
• Rule 12(6)(a) requires at least one year between the ESOP grant date and vesting. Service before the grant date does not count towards this one-year period.
• An ESOP grant to one employee that equals or exceeds 1% of issued capital in a year needs a separate shareholder resolution under Rule 12(4).
• Every ESOP grant must be entered in the Register of Employee Stock Options (Form SH-6) and disclosed in the Directors’ Report for the year.
• No tax arises when ESOPs are granted. Tax arises at exercise under Section 17 of the Income-tax Act, 2025.
• The ESOP scheme designates who approves a grant, usually the board or a committee, and that approval must be recorded in a resolution.

What is an ESOP grant?

An ESOP grant is the act that creates an option for a named employee under an already-approved scheme: it fixes the number of options, the exercise price, the vesting schedule, and the exercise period for that person.

The right a grant creates is itself defined in the Companies Act. Section 2(37) of the Companies Act, 2013 defines an “employees’ stock option” as the option given to a director, officer, or employee of a company, or of its holding or subsidiary company, to purchase or subscribe for the company’s shares at a future date at a predetermined price. The Act defines the option; a grant is simply the act of allocating that statutory right to one person on one date.

Approvals required before granting ESOPs

A company can grant options only under a scheme that its shareholders have approved. Section 62(1)(b) requires a special resolution, and Rule 12(1) repeats the requirement; private companies may pass an ordinary resolution instead under MCA exemption notification G.S.R. 464(E) dated 5 June 2015, although Rule 12(1) has not been amended to match. The Articles of Association must authorise the issue of shares under an ESOP, and authorised share capital must be large enough to cover the shares the company will allot when options are exercised.

The approval sequence, the disclosures required in the explanatory statement, and the related filings are covered in our guides to the ESOP scheme in India and ESOPs under the Companies Act, 2013. The size of the option pool is covered in our guide to structuring an employee equity pool.

Who can receive an ESOP grant?

Rule 12(1) defines who counts as an "employee" for ESOP purposes. ESOPs can be granted to:

• a permanent employee of the company, working in India or outside India
• a director of the company, whether whole-time or not, other than an independent director
• a permanent employee or a director (other than an independent director) of a subsidiary of the company, in India or outside India, or of its holding company

An employee who is a promoter or belongs to the promoter group cannot receive ESOPs. Neither can a director who holds more than 10% of the company's outstanding equity shares, whether directly or indirectly, personally, through a relative, or through a body corporate.

Startup exemption for promoters and 10% directors

A startup company is exempt from both exclusions for ten years from its incorporation or registration. This carve-out comes from a proviso to the Explanation under Rule 12(1), substituted by the Companies (Share Capital and Debentures) Amendment Rules, 2019. Within that window, a founder who is also a director holding 30% of the company can receive options; outside it, the same grant is barred.

The proviso defines "startup" by reference to a specific Department for Promotion of Industry and Internal Trade (DPIIT) notification. DPIIT replaced its 2019 startup definition with a new notification dated 4 February 2026, so a company relying on the proviso should confirm with its company secretary which definition governs the grant before it is made.

Permanent employees and the ESOP scheme's own criteria

Neither the Companies Act nor the Rules define "permanent employee". The term is generally read as a person on the company's payroll under a contract of employment, distinct from a consultant or advisor engaged under a contract for services.

Rule 12 sets the outer boundary of who can receive options; the ESOP scheme narrows that pool further, through the classes of employees and the appraisal process disclosed to shareholders under Rule 12(2)(b) and (c). Every grant must satisfy both the statutory definition and the scheme's own criteria on the grant date.

Steps to grant ESOPs to employees

1. Confirm the employee is eligible under Rule 12 and under the scheme's own eligibility criteria.
2. Confirm the grant fits within the unallocated option pool and the per-employee limit disclosed under Rule 12(2)(i).
3. Check whether the grant needs a separate shareholder resolution under Rule 12(4), and obtain it first if so.
4. Fix the grant terms: number of options, exercise price, vesting schedule, and exercise period.
5. Obtain approval from the authority the scheme designates, usually the board or a board committee, and record it in a resolution.
6. Issue the grant letter and obtain the employee's signed acceptance within the period the scheme allows. Download the ESOP grant letter template.
7. Enter the grant in the Register of Employee Stock Options in Form SH-6.
8. Begin recognising the ESOP expense from the grant date, and include the grant in the Directors' Report disclosures for the year.

Setting the terms of an ESOP grant

Number of options

Each grant must fit within two limits disclosed to shareholders when the scheme was approved: the total pool and the maximum number of options per employee under Rule 12(2)(i). Grants should be stated as a number of options rather than a percentage of the company, because a percentage changes every time the company issues shares, while the number of options does not.

Rule 12(4)(b) adds a further check. If an identified employee is to receive options in any one year equal to or exceeding 1% of the company's issued capital at the time of grant, shareholders must approve that grant by a separate resolution. For a company with 10,00,000 issued equity shares, the threshold is 10,000 options, so an employee receiving 12,000 options in the year needs that resolution before the grant. The base is issued capital excluding outstanding warrants and conversions, which means the share count on the register, not the fully diluted count.

Rule 12(4)(a) also requires a separate shareholder resolution for any grant to employees of a subsidiary or holding company.

Exercise price

Rule 12(3) gives the company freedom to determine the exercise price in conformity with applicable accounting policies, and the price or the formula for arriving at it must already be disclosed under Rule 12(2)(f). Grants made at different times can therefore carry different exercise prices, provided each follows the disclosed formula.

The exercise price has a floor. Section 53 of the Companies Act, 2013 prohibits a company from issuing shares at a discount to face value, with sweat equity under Section 54 as the only exception, so the exercise price of an ESOP cannot be lower than the face value of the underlying share.

The price also determines cost on both sides of the grant. A lower exercise price increases the fair value of each option and therefore the ESOP expense the company records, and it increases the employee's taxable perquisite at exercise, which is calculated as fair market value minus the price paid.

Vesting schedule

Rule 12(6)(a) requires a minimum period of one year between the grant of options and their vesting. The one-year clock starts on the grant date, not on the employee's joining date. An employee who joins on 1 April 2026 and receives a grant approved on 1 October 2026 cannot have any options vest before 1 October 2027, even if the grant letter names 1 April 2026 as the vesting commencement date.

The only statutory relief from the one-year period applies when options are granted in replacement of options held in a company that has merged or amalgamated into the grantor; the period those earlier options were held counts towards the minimum. Rule 12(8)(d) and (e) also override the schedule on death or permanent incapacity during employment, when all options granted up to that date vest immediately, in the legal heirs or nominees in the case of death. Vesting design beyond these rules, including cliffs, frequency, and performance conditions, is covered in our guide to vesting schedules.

Exercise period and separation

Rule 12(8)(f) fixes the treatment of unvested options when employment ends. On resignation or termination, all options that have not vested on that day expire; vested options remain exercisable within the period the scheme specifies. The scheme also sets the conditions under which vested options can lapse, such as termination for misconduct under Rule 12(2)(k). The grant letter should restate these terms for the employee, but it cannot extend unvested options beyond separation. The length of the post-separation window is covered in our guide to the post-termination exercise period.

Who approves an ESOP grant?

Rule 12 does not name a grant-level approver for unlisted companies. The scheme designates the authority that makes grants, usually the board or a committee of the board, and a grant is valid only if that authority approves it within the limits the scheme delegates to it. The resolution should record the employee, the number of options, the exercise price, the vesting schedule, and the grant date, and it should authorise a named person to sign the grant letter on the company's behalf.

The signatory's authority to bind the company comes from that resolution. A grant letter signed by a founder or CFO without a corresponding resolution leaves the grant open to challenge in due diligence.

Grants covered by Rule 12(4), to employees of a subsidiary or holding company or at or above the 1% threshold, cannot be approved by the board alone even when they fit within the pool. Shareholder approval by separate resolution comes first. Listed companies must route grants through a compensation committee under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.

Why the ESOP grant date matters

A single grant can carry three dates: the date the authority approves it, the date on the grant letter, and the date the employee accepts. The grant date controls two outcomes, so the company needs to know which date it is relying on.

The first outcome is statutory. The one-year minimum under Rule 12(6)(a) runs from the grant date, and a letter dated earlier than the approval makes the cliff appear to complete before the Rule allows. The board minutes, the grant letter, and the SH-6 entry should all carry the same grant date.

The second outcome is accounting. Under Ind AS 102, the grant date is the date on which the company and the employee share an understanding of the terms of the award; where an approval process applies, it is the date that approval is obtained. The fair value of the options is measured on that date and fixes the expense for the life of the grant, so the company needs an option valuation as of the grant date. The share valuation used for the employee's tax is a separate exercise performed as of the exercise date.

The ESOP grant letter and its template

The grant letter communicates the approved terms to the employee and records their acceptance. See our ESOP grant letter format guide for the full clause-by-clause contents, or start directly from the downloadable ESOP grant letter template. 

Records and disclosures after an ESOP grant

Register of Employee Stock Options (Form SH-6)

Rule 12(10) requires the company to maintain a Register of Employee Stock Options and to enter the particulars of each grant in it forthwith. The register is kept at the registered office or another place the board decides, and entries are authenticated by the company secretary or another person the board authorises. The format and fields are covered in our guide to the SH-6 register.

Directors' Report disclosures

Rule 12(9) requires the board to disclose, in the Directors' Report for the year, the options granted, vested, exercised, and lapsed; the shares arising from exercise; the exercise price; any variation of terms; money realised by exercise; and the total options in force. Employee-wise details are required for grants to key managerial personnel, to any employee who received 5% or more of the options granted during the year, and to identified employees whose grant in the year equalled or exceeded 1% of issued capital.

Filings and accounting

The grant itself does not require a filing with the Registrar of Companies. Form PAS-3, the return of allotment, is filed when the company allots shares on exercise. The ESOP expense is recognised from the grant date over the vesting period, under Ind AS 102 for companies reporting under Ind AS, or under the ICAI Guidance Note on Accounting for Employee Share-based Payments for companies reporting under Indian GAAP.

How ESOP grants are taxed

Neither the grant nor the vesting of options creates a tax liability for the employee. Tax arises at exercise: Section 17 of the Income-tax Act, 2025, which replaced the Income-tax Act, 1961 from 1 April 2026, treats the value of specified securities allotted free or at a concessional rate as a perquisite. That value is the fair market value of the shares on the exercise date minus the amount the employee paid. The perquisite is taxed as salary, and the employer deducts tax at source.

Employees of eligible startups can defer this tax under the startup deferral provisions, covered in our guide to perquisite tax deferral for startups. Tax on the later sale of shares is covered in our guide to ESOP taxation in India.

Granting ESOPs on EquityList

A single grant passes through several hands: the person preparing it, the directors approving it, the signatory executing the letter, and the employee accepting it. When grants are tracked across spreadsheets and email, the approval date, the letter date, and the register entry drift apart, which is the mismatch that surfaces during audits and due diligence.

EquityList records each grant against its scheme and pool, and shows the grant's share of the pool and the employee's fully diluted ownership before the grant is issued. Board consent requests go to directors for e-signature, and the approval date is linked to the grant once the consent is signed. Grant letters are generated from the company's own templates and executed through company and employee e-signatures, and every grant flows into a Register of Employee Stock Options that can be downloaded as an SH-6 report.

Explore EquityList for equity grants management.

FAQs on how to grant ESOPs to employees in India

Is ESOP considered in CTC?

There is no legal rule either way. Many Indian companies, especially startups, quote a notional ESOP value inside the CTC breakup in an offer letter, since CTC is an employer-defined figure rather than a term the Companies Act regulates. That value is not equivalent to guaranteed cash: it is contingent on the one-year cliff under Rule 12(6)(a), on the employee completing vesting, and ultimately on a liquidity event. Anyone comparing offers should ask for the exercise price and vesting schedule behind a quoted ESOP figure, not just the headline number.

Should ESOP terms be included in the employee's offer letter?

No. The offer letter can state that the employee will be eligible for ESOPs, but it should not fix binding grant terms, such as the number of options or a vesting start date, before the grant itself exists. A grant can only be made once the scheme is approved and the authority the scheme designates has approved that specific grant, so a term promised in the offer letter risks conflicting with what the scheme or Rule 12(6)(a) actually permits, for example if the offer letter implies vesting starts on the joining date rather than the grant date.

Can ESOPs be granted to consultants or advisors?

No. Rule 12 limits ESOPs to permanent employees and non-independent directors of the company, its subsidiary, or its holding company. A consultant or advisor engaged under a services contract does not fall within that definition, so equity for advisors needs a route outside the ESOP scheme.

Can an ESOP scheme include future employees?

Yes. The explanatory statement under Rule 12(2)(b) identifies classes of employees entitled to participate, not named individuals. Employees who join after the scheme is approved can receive grants without fresh shareholder approval, provided they fall within a disclosed class, the pool has capacity, and the grant does not trigger a separate resolution under Rule 12(4).

Can the exercise price be different for each employee?

Yes. Rule 12(3) gives the company freedom to set the exercise price in conformity with its accounting policies, and Rule 12(2)(f) requires only that the price, or the formula for arriving at it, be disclosed to shareholders. Grants made on different dates can carry different prices if each follows the disclosed formula, but no exercise price can fall below the face value of the share, since Section 53 of the Companies Act prohibits issuing shares at a discount.