Wealth or litigation, decided by how the plan is drafted, approved, valued and taxed.
The pool size sets the dilution. The grant logic sets who is rewarded. The approval makes it legal. The valuation sets the tax. The leaver clauses decide every departure. The cross-border and listing rules decide whether it survives maturity. A plan drafted in one of these silos fails in another. We write them as one instrument.
Pool Sizing · Grant Logic · Cap-Table · Scheme Drafting
The scheme built from the cap table outward: pool size against dilution, grant and allocation logic, the option grant letter, the plan document, and a vesting, cliff and exercise engine designed for the stage the company is actually at, not a template from another company.
Request this workstreamSection 62(1)(b) · Rule 12 · MGT-14 · SH-6 · PAS-3
The company-law pathway executed cleanly: confirming the articles permit the issue, the special or ordinary resolution, the explanatory statement, Form MGT-14, the register of options in Form SH-6, and the return of allotment in Form PAS-3 on exercise, with the permitted-grantee rules applied.
Request this workstreamSection 17(2)(vi) · Section 192 · Section 192(1C) · 80-IAC
The two-stage tax mapped before a single option is granted: the perquisite at exercise and withholding under Section 192, capital gains at sale, and whether the Section 192(1C) deferral is genuinely available on the strength of a Section 80-IAC certificate, not DPIIT recognition alone.
Request this workstreamMerchant-Banker FMV · Down Rounds · 409A-style Rigour
The number everything turns on, made defensible: the SEBI-registered Category I merchant-banker fair market value at exercise, how it behaves in a down round or distressed sale, and the documentation that lets the valuation survive a tax officer and a disgruntled optionholder alike.
Request this workstreamGood Leaver · Bad Leaver · Buyback · Cashless Exercise
The clauses that decide every departure and every liquidity event: good-leaver and bad-leaver treatment of vested and unvested options, acceleration triggers, company buyback and cashless exercise mechanics, and the tax and company-law consequences of each, written in rather than argued later.
Request this workstreamFEMA · LRS · Foreign Parent Grants · SEBI SBEB 2021
The two ends of the maturity curve: options granted by a foreign parent to Indian employees or by an Indian company to staff abroad, read through FEMA, the Liberalised Remittance Scheme and dual-jurisdiction withholding, and migration of an unlisted plan onto the SEBI SBEB Regulations, 2021 at listing.
Request this workstreamSix stages. Each hands clean inputs to the next. The objective sizes the pool. The eligibility shapes the grant. The approval makes it enforceable. The valuation sets the tax. The leaver clauses govern every departure. The cross-border and listing design protects it at maturity. Nothing is retrofitted.
Start with what the plan is for, retention, reward, founder alignment or an investor condition, and read it against the current cap table, the dilution tolerance and the stage of the company, so the pool is sized to a purpose and not to a guess.
Fix who can receive options under Rule 12 or the SEBI SBEB Regulations, apply the promoter and ten-percent-director rules and the DPIIT startup carve-out, and design the grant logic, the vesting schedule, the one-year cliff and the exercise window.
Confirm the articles permit the issue, pass the special or ordinary resolution with a compliant explanatory statement, file Form MGT-14, open the register of options in Form SH-6, and set the PAS-3 return-of-allotment process for exercise.
Commission the merchant-banker fair market value basis, model the perquisite at exercise and capital gains at sale, and determine whether the Section 192(1C) deferral is available on a Section 80-IAC certificate before a single option is granted.
Draft the good-leaver and bad-leaver treatment, acceleration triggers, and the buyback and cashless-exercise mechanics, with their tax and company-law consequences built into the plan rather than negotiated in the middle of a dispute.
Layer in FEMA, the Liberalised Remittance Scheme and dual-jurisdiction withholding for cross-border grants, and build the plan so it can migrate onto the SEBI SBEB Regulations, 2021 without being rewritten during an IPO.
Nobody litigates Section 62. They litigate the valuation in a down round, the treatment of vested options for the employee who resigned on bad terms, the buyback price when the company needs the shares back, and the withholding on a grant that crossed a border. These are the clauses a template does not have and a founder does not see until they are standing in them.
Tell us the stage of the company and the matter you need resolved. A senior partner reads every submission in confidence and responds within one business day.
Short, direct, on the record.
For an unlisted company, an Employee Stock Option Plan is issued under Section 62(1)(b) of the Companies Act, 2013 read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. A public company needs a special resolution; a private company can proceed on an ordinary resolution following the MCA notification of 5 June 2015, provided it is not in default. The articles of association must permit the issue, the special resolution is filed in Form MGT-14 within thirty days, the plan is recorded in the register of employee stock options in Form SH-6, and the return of allotment in Form PAS-3 is filed after exercise. The moment the company is listed, the governing instrument changes entirely: the scheme must comply with the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, with a compensation committee, trust rules where a trust route is used, and continuous disclosure. A plan drafted only for the unlisted phase can require surgery at the worst possible time, during an IPO.
An ESOP is taxed at two distinct moments. At exercise, the difference between the fair market value of the share on the date of exercise and the exercise price the employee actually pays is treated as a perquisite under Section 17(2)(vi) of the Income-tax Act, taxed as salary, with the employer deducting tax at source under Section 192. For an unlisted share, that fair market value must be determined by a SEBI-registered Category I merchant banker as on the date of exercise. This is where the pain sits: the employee owes tax on a paper gain while holding an illiquid share and no cash to pay it. At sale, the difference between the sale price and the fair market value already taxed at exercise is charged as capital gains. Designing the plan without modelling both events, and the liquidity gap between them, is how an instrument meant to reward people ends up resented by them.
Yes, but the gate is narrower than most founders assume. Section 192(1C) allows an eligible startup to defer the deduction and payment of tax on the exercise perquisite. The catch is eligibility: the benefit is available only to a startup that holds a valid certificate of eligibility under Section 80-IAC. DPIIT recognition alone is not enough; the Inter-Ministerial Board certificate under Section 80-IAC is the operative document, and a great many recognised startups do not hold it. Where it applies, the tax is deferred and becomes payable at the earliest of three events: forty-eight months from the end of the assessment year in which the shares were allotted, the date the employee ceases employment, or the date the employee sells the shares. The deferral is real relief, but it is a timing benefit tied to a certificate, not a licence to ignore the liability.
Under Rule 12, options may be granted to permanent employees working in India or abroad and to directors, but not to independent directors. They may not be granted to a promoter or a member of the promoter group, or to a director who, directly or indirectly, holds more than ten percent of the outstanding equity. There is a deliberate carve-out: a company that is a DPIIT-recognised startup is exempt from these promoter and ten-percent-director exclusions for ten years from the date of its incorporation, which is what lets founder-operators of early startups participate. On timing, there must be a minimum vesting period of one year between grant and the first vesting, the cliff, under both Rule 12 for unlisted companies and the SEBI SBEB Regulations, 2021 for listed ones; the only recognised exception to the one-year cliff is accelerated vesting on death or permanent incapacity.
The statute is the easy part. The disputes live in the spaces the statute leaves open. Valuation is the first: the fair market value at exercise is a merchant-banker determination, and in a down round, a buyback, or a distressed sale that number is contested by everyone with an interest in it. The second is the leaver: what happens to vested-but-unexercised options and to unvested options when an employee resigns, is terminated for cause, or leaves on bad terms, and whether your plan distinguishes a good leaver from a bad leaver at all. The third is liquidity: cashless exercise, company buyback and secondary mechanics each carry their own tax and company-law consequences that must be built in, not bolted on. The fourth is cross-border: options granted by a foreign parent to Indian employees, or by an Indian company to employees abroad, engage FEMA, the Liberalised Remittance Scheme and withholding in two jurisdictions at once. These are not edge cases. They are where most ESOP litigation begins.
A template gives you a document. A chartered accountant computes the tax once the structure is fixed. AMLEGALS engineers the structure the document records and the tax sits on, read through the TCL Framework: the Technical seam (the cap-table mechanics, the pool size, the vesting and exercise engine, the register and the filings), the Commercial seam (dilution, the liquidity path, the retention objective the plan is actually meant to serve, and the diligence view a future investor or acquirer will take), and the Legal seam (Section 62 and Rule 12 or the SEBI SBEB Regulations, Section 17(2)(vi) and Section 192(1C), FEMA on cross-border grants, and the leaver and buyback terms). We draft an ESOP that holds under an employee reading it, a tax officer reading it and a diligence team reading it, all at once.
The perquisite falls at exercise, on an illiquid share, in cash the employee does not have. Section 192(1C) can defer it, but only for a startup holding a Section 80-IAC certificate. The liquidity gap is a design problem, not an afterthought.
Vested-but-unexercised options, acceleration, good leaver versus bad leaver: these decide whether a departure is clean or a lawsuit. Most plans are silent exactly where they need to speak.
The merchant-banker FMV at exercise sets the tax and the grievance. In a down round, a buyback or a distressed sale, that number is contested by everyone with an interest in it. Defensibility is built before it is challenged.
The earliest mandate is the most valuable mandate. The pool, the vesting, the valuation basis and the leaver architecture are decided long before the first option is exercised.
AMLEGALS
An ESOP in an unlisted company is issued under Section 62(1)(b) of the Companies Act, 2013 read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. A public company must pass a special resolution; a private company may adopt the plan by ordinary resolution under the MCA notification of 5 June 2015, provided it is not in default of its filings. The Articles of Association must permit the issue, a special resolution is filed with the Registrar in Form MGT-14, a Register of Employee Stock Options is kept in Form SH-6, and the return of allotment is filed in Form PAS-3 after exercise. A listed company is additionally governed by the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.
Taxation arises at two stages. At exercise, the difference between the fair market value of the share on the date of exercise and the exercise price paid is a perquisite taxable as salary under Section 17(2)(vi), on which the employer deducts tax at source under Section 192. For unlisted shares, the fair market value must be determined by a SEBI-registered Category I merchant banker as on the date of exercise. At sale, the difference between the sale price and the fair market value taken at exercise is taxed as capital gains, long-term or short-term depending on the holding period and whether the share is listed.
Section 192(1C) allows an eligible startup to defer deduction of tax at source on the ESOP perquisite. The benefit is available only to a startup that holds a valid certificate of eligible business under Section 80-IAC; mere DPIIT recognition is not enough. Where it applies, the tax on the exercise perquisite is payable at the earliest of three events: the expiry of forty-eight months from the end of the assessment year in which the shares were allotted, the date the employee ceases employment, or the date the employee sells the shares. The perquisite is still disclosed in the year of allotment and the tax is computed at the rates of that year.
Both the Companies Act framework for unlisted companies and the SEBI 2021 Regulations for listed companies require a minimum vesting period of one year between grant and the first vesting, the cliff. Immediate vesting is permitted only on the death or permanent incapacity of the employee. Under Rule 12, options may be granted to permanent employees in India or abroad and to directors other than independent directors, but not to promoters, members of the promoter group, or directors holding more than ten percent of the equity. A company recognised as a DPIIT startup is exempt from these promoter and ten-percent exclusions for ten years from incorporation.
The recurring disputes cluster around valuation, leaver treatment and cross-border reach. The fair market value at exercise drives the tax and is frequently contested where a down round, a buyback or a fresh valuation intervenes. Good-leaver and bad-leaver definitions, the treatment of vested but unexercised options on resignation, and cashless-exercise and buyback mechanics are often drafted loosely and litigated later. For options granted to employees outside India, or by a foreign parent to Indian employees, the interaction with FEMA, the Liberalised Remittance Scheme and withholding adds a layer that is easy to miss. These are matters of structure, not boilerplate.
AMLEGALS designs and documents the full ESOP lifecycle: the plan and grant letters, Board and shareholder approvals, the MGT-14, SH-6 and PAS-3 filings, the vesting and leaver architecture, the valuation interface with the merchant banker or chartered accountant, and the tax position at grant, exercise and sale including the Section 192(1C) deferral for eligible startups. For founders we align the pool with the cap table and future rounds; for mature and listed companies we align the plan with the SEBI 2021 Regulations and the compensation committee; and for cross-border grants we read the plan against FEMA and withholding so the structure holds under later scrutiny.