ESOP Advisory / Due Diligence
ESOP Cleanup Before Fundraising: Fixing Grants, Registers, Valuation and Tax Gaps
ESOP Due Diligence
Form SH-6
Historical Valuation
Tax Cleanup
Funding Readiness
A 140-employee technology-services company approached Elite Valuation seven weeks before its investor data room was due to open. Its three-year-old ESOP had 46 historical grants, an SH-6 register that had not been updated after the first year, two subsidiary-employee grants requiring fresh approvals, and the same valuation report had been used for three separate exercise events across two financial years. The ESOP file was reconstructed, valuations and tax workings were corrected, registers were reconciled and the equity-compensation diligence section ultimately closed with no adverse findings, no indemnity and no holdback.
46 grants
3 events
2 grants
7 weeks
01. The ESOP Looked Fine Until Diligence Was Seven Weeks Away
The client was a 140-employee technology-services company with an ESOP that had been implemented three years earlier. The original adviser had been engaged mainly to draft the scheme and pass the initial resolutions, while ongoing administration was handled internally.
Over the following three years, 46 grants were issued and tracked primarily through an HR spreadsheet. The statutory Form SH-6 register had not been updated after the first year, creating a gap between the formal corporate record and the operational grant tracker.
Two grants had been made to employees of a subsidiary without the separate shareholder approval that the company needed for group-company grantees. In addition, the same valuation report had been reused for three separate exercise events across two financial years, leaving the related perquisite computations and tax withholding unsupported by exercise-date fair values.
The company approached Elite Valuation only seven weeks before the investor data room opened. The objective was not to redesign the ESOP; it was to reconstruct what had actually happened, identify every inconsistency, regularise what could be regularised and present investors with one reconciled ESOP file.
"ESOP due diligence rarely fails because the scheme document is missing. It fails because the grants, register, allotments, valuations, payroll and cap table no longer tell the same story."
02. Six Gaps Hidden Inside a Three-Year-Old ESOP
The clean-up exercise focused on the joins between HR, secretarial, finance and payroll records—the places where otherwise valid ESOP work had drifted over time.
| Challenge Area | Description & Valuation Impact |
|---|---|
| SH-6 Register Not Current Statutory Records | The Form SH-6 register had not been updated after the first year even though grants continued. Investor diligence would therefore have found a statutory register that did not reflect the live option position. |
| 46 Grants Tracked in HR Sheets Historical Reconstruction | Grant letters, board minutes and HR records had to be reconstructed into one chronology so that granted, vested, exercised, lapsed and outstanding options could be traced to source documents. |
| Subsidiary-Employee Grants Approval Gap | Two grants to employees of a subsidiary required separate shareholder approval. The absence of that approval created a specific governance issue that could not be solved merely by updating the register. |
| Stale Valuation Reused Exercise-Date FMV | The same valuation report had been used for three exercise events across two financial years. That meant the exercise-date fair market values supporting employee perquisite computations were not contemporaneous. |
| Perquisite and TDS Exposure Payroll Tax | Once the historical exercise-date valuations were rebuilt, the affected employee perquisite and withholding computations also had to be recomputed and aligned with the payroll team's corrective reporting position. |
| Cap Table and PAS-3 Reconciliation Equity Integrity | The reconstructed ESOP history had to reconcile to the register of members and every relevant PAS-3 allotment filing so that the fully diluted cap table presented to investors matched the statutory share records. |
03. Reconstruct, Regularise, Revalue and Reconcile
The clean-up was run as a historical reconstruction first and a compliance remediation second. Nothing was regularised until the team knew what had actually happened.
Phase A: Build the complete historical grant chronology
The team collected grant letters, employee acceptances, board minutes, HR spreadsheets and bank records and reconstructed the full position for all 46 grants. Each grant was mapped to its date, vesting status, exercise activity and remaining options.
Phase B: Reconcile options to shares actually allotted
The reconstructed grant and exercise history was matched to the register of members and every relevant PAS-3 filing. This ensured that options shown as exercised actually reconciled to shares issued and the company's legal share capital.
Phase C: Rebuild Form SH-6 and bring the statutory register current
The incomplete SH-6 register was rebuilt using the reconstructed chronology so that grants, vesting, exercises, lapses and shares arising on exercise were captured in one current statutory record rather than only in the HR tracker.
Phase D: Regularise the two subsidiary-employee grants
The two group-company grants were identified separately and fresh shareholder approvals were completed with legal/secretarial support. The remediation file documented the original gap and the corrective action taken before diligence.
Phase E: Revalue the three historical exercise events
Separate exercise-date valuations were prepared for each of the three historical exercises instead of reusing one stale report. The resulting fair values were used to recompute the employee perquisite amounts and support the payroll correction process.
Phase F: Close the diligence file and install ongoing controls
The final ESOP data-room file included the scheme, approvals, reconstructed SH-6 register, grant documents, valuation support, exercise records, allotment evidence, tax workings and a forward compliance calendar. The company then moved to an annual administration model so the file would not drift again.
6 ESOP clean-up components applied:
Diligence gap-to-remediation matrix:
| Area | Position Found | Remediation |
|---|---|---|
| Historical grants | 46 grants tracked across HR records and grant documents | Reconstructed into one verified chronology |
| Form SH-6 | Not updated after first year | Rebuilt and brought current |
| Subsidiary grants | 2 grants without separate approval | Fresh approvals completed with counsel |
| Exercise valuations | 1 report reused for 3 events across 2 FYs | 3 exercise-date valuations prepared |
| Perquisite / TDS | Historical computations lacked contemporaneous FMV support | Recomputed and corrective payroll position supported |
| Diligence outcome | Potential ESOP findings before clean-up | No adverse findings, indemnity or holdback |
Companies Act and tax framework considered in the clean-up
Section 62(1)(b) and Rule 12: employee stock options of an unlisted company are governed by the Companies Act framework, including shareholder approval requirements and specific approvals for grants to employees of holding or subsidiary companies where applicable.
Form SH-6: Rule 12 requires the company to maintain the Register of Employee Stock Options in Form SH-6. The register is not merely an internal HR tracker; it is part of the statutory ESOP record.
Exercise and allotment records: exercised options must reconcile to the register of members and the relevant allotment filings. The clean-up therefore traced historical exercise events through to PAS-3 and share records.
Exercise-date tax support: the applicable income-tax and payroll framework requires the employee perquisite computation to be supported by the fair market value relevant to the exercise event. Because the three exercises occurred historically, the correct tax treatment was assessed by reference to the law applicable to each exercise date rather than by applying one stale valuation across periods.
04. Result: ESOP Diligence Closed with No Adverse Findings
The value of the exercise was not a new scheme document; it was a complete historical file that investors could trace from grant approval through exercise, tax and share allotment.
46 grants
3 events
2 grants
7 weeks
- All 46 historical grants were reconstructed from source documents and converted into one option chronology that could be traced by investor counsel.
- The Form SH-6 register was rebuilt and reconciled to the register of members and relevant PAS-3 filings, eliminating the mismatch between the HR tracker and statutory records.
- The two subsidiary-employee grants were regularised through fresh approvals with counsel before the data room opened, removing a governance point that would otherwise have surfaced in diligence.
- Separate valuations were prepared for the three historical exercise events, and the affected perquisite/TDS computations were recomputed with the payroll team rather than defended using one reused valuation report.
- The equity-compensation diligence section ultimately closed with no adverse findings, no indemnity and no holdback, and the company moved to annual ESOP administration to prevent the same record drift recurring.
Five Lessons from an ESOP Clean-Up
Most ESOP diligence issues are not created on the date the scheme is approved; they accumulate slowly when ongoing ownership of the plan is fragmented across teams.
Maintain the statutory register as grants happen
The SH-6 register had been allowed to fall behind after Year 1 while 46 grants continued to be administered elsewhere. Reconstructing three years of history cost more than keeping the register current would have.
Group-company employees need to be identified at approval stage
The two subsidiary-employee grants were not economically unusual, but they required a different approval trail. Diligence focuses on whether that trail exists, not only on whether the employee actually worked for the group.
Do not reuse one valuation across multiple exercise dates
Three exercise events across two financial years had been supported by the same report. Exercise-date tax support needs to reflect the valuation relevant to each event, particularly when company value changes over time.
The cap table must reconcile to legal share records
Investor diligence does not stop at the option ledger. Exercises must connect to allotments, PAS-3 filings and the register of members so the fully diluted ownership schedule can be trusted.
Clean the ESOP before the investor asks for it
The company had only seven weeks before the data room opened. Completing the reconstruction first meant the investor reviewed a resolved file rather than discovering open gaps and converting them into indemnities, holdbacks or closing conditions.
Why Choose Elite Valuation
Elite Valuation supports companies that need to implement, administer or clean up ESOPs before fundraising, audit, acquisition or investor due diligence.
For ESOP regularisation assignments, the firm brings together advisory, corporate-record reconstruction, valuation, cap-table reconciliation, finance and tax support so that the scheme, grants, register, allotments and payroll records tell one consistent story.
As an IBBI Registered Valuer with CA and CS capability, Elite Valuation can coordinate the valuation, secretarial and finance workstreams that typically become fragmented when an ESOP has been administered across multiple internal and external providers.
IBBI Registered Valuer
CA & CS Led Advisory
ESOP Due Diligence
End-to-End ESOP Support
ESOP Cleanup
ESOP Valuation
Dilution Modelling
ESOP Valuation
Form SH-6 Reconciliation
ESOP Tax Support
Annual ESOP Administration
Sagar Shah — CA | CS | IBBI Registered Valuer | Founder, Elite Valuation
Sagar Shah is the founder of Elite Valuation and a qualified Chartered Accountant, Company Secretary, and IBBI Registered Valuer with prior experience at Ernst & Young. He specialises in business Valuation, M&A advisory, ESOP Valuation, FEMA compliance, and regulatory Valuation across the Companies Act, SEBI, and RBI frameworks. Elite Valuation operates pan-India from Ahmedabad, advising companies of all stages and sizes.
