Table of contents
- Key Takeaways:
- Which Law Governs ESOPs for a Startup Versus a Listed Company?
- Who Can Receive ESOPs? Eligibility Rules for Startups vs Listed Companies
- How Is the ESOP Exercise Price Determined in a Startup vs a Listed Company?
- Shareholder Approval and Governance: Ordinary Resolution vs Special Resolution
- ESOP Valuation Requirements Across the Lifecycle: Who Values What, and When
- ESOP Trusts: How Secondary Acquisition Rules Differ for Startups and Listed Companies
- Taxation: Startup ESOP Deferral vs Ordinary Perquisite Tax for Listed Companies
- Accounting and Disclosure: Ind AS 102 for Startups vs SEBI-Mandated Disclosure for Listed Companies
- What Happens to Founder ESOPs When a Startup Goes Public?
- Setting Up a Compliant ESOP Scheme: The Process at Each Stage
- Common Mistakes in Startup vs Listed Company ESOP Structuring
- Closing Summary: The Same Instrument, Two Different Rulebooks
- Frequently Asked Questions — ESOP for Startups vs Listed Companies
📌 For Founders, CFOs & Company Secretaries — What You Must Know
- Startups and other unlisted companies issue ESOPs under Section 62(1)(b) of the Companies Act, 2013 read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. Listed companies must comply with these provisions plus the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.
- A DPIIT-recognised startup can grant ESOPs to promoter-founders and directors holding over 10 percent equity for up to 10 years from incorporation. Listed companies cannot grant ESOPs to promoters, promoter group members or independent directors at all.
- Startup ESOPs rely on a SEBI-registered Category I Merchant Banker's fair market value at exercise for tax purposes. Listed company ESOPs simply use the stock exchange price on the exercise date, with no third-party valuer required.
- Eligible DPIIT-recognised startups can defer employee TDS on ESOP perquisite under Section 192(1C). Listed company employees generally get no equivalent deferral.
- Private companies not in default of filings can approve an ESOP scheme by ordinary resolution. Listed companies must pass a special resolution and obtain stock exchange in-principle approval before allotment.
Every founder who has issued options to an early engineer, and every company secretary preparing an ESOP disclosure for an annual general meeting, eventually runs into the same misconception: that an Employee Stock Option Plan is one product governed by one rulebook. It is not. The Companies Act, 2013 gives every company, listed or not, the statutory permission to grant ESOPs under Section 62(1)(b). But the moment a company's shares are admitted to trading on a recognised stock exchange, a second, considerably stricter regulator steps in. The SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 layer on eligibility exclusions, governance requirements, trust mechanics and disclosure obligations that simply do not exist for an unlisted startup issuing options to its tenth employee.
The practical consequences of missing this distinction are significant. A startup that copies a listed company's ESOP scheme template will often exclude its own founders from eligibility unnecessarily, since the startup-specific carve-out in Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 does not appear in any SEBI-oriented template. Conversely, a company approaching its Initial Public Offering that continues to administer ESOPs the way it did as a ten-person private company will find its scheme non-compliant the moment its draft red herring prospectus reclassifies its founders as promoters. At Elite Valuation, we support both ends of this journey, from a founder's first ESOP pool as a DPIIT-recognised startup, through ESOP structuring and valuation at each funding round, to the scheme restructuring that a SEBI-compliant framework demands ahead of listing.
This guide sets out, point by point, exactly where startup ESOP rules and listed company ESOP rules diverge, from who is eligible to receive options, through pricing, shareholder approval, trust mechanics, valuation at each stage of the ESOP lifecycle, taxation, and what happens to a founder's own options when the company finally lists.
Key Takeaways:
- Two-layer framework: unlisted startups follow only the Companies Act and Rule 12; listed companies follow the Companies Act plus the SEBI SBEB and SE Regulations, 2021
- Promoter eligibility flips entirely: DPIIT-recognised startups may grant ESOPs to promoter-founders for up to 10 years from incorporation; listed companies cannot grant ESOPs to promoters or independent directors, with only a narrow retention exception at IPO
- Approval route differs: a private company not in default of filings can use an ordinary resolution; a listed company must pass a special resolution and obtain stock exchange in-principle approval
- Valuation trigger differs by stage: unlisted company ESOPs need a Category I Merchant Banker's fair market value at exercise for tax; listed company ESOPs use the stock exchange closing price directly
- Tax deferral is a startup-only benefit: Section 192(1C) defers TDS on ESOP perquisite for eligible DPIIT and Section 80-IAC startups; listed company employees pay tax in the year of exercise
- Trust mechanics diverge: unlisted companies use the comparatively light Rule 16 trust route; listed companies face SEBI's Chapter III trust rules, including a 2 percent annual and 5 percent cumulative secondary acquisition cap
- Accounting converges more than people expect: both unlisted Ind AS companies and listed companies must largely use the fair value method for ESOP expense recognition, though smaller non-Ind AS startups retain limited flexibility
- IPO transition creates a specific conflict: founders reclassified as promoters in a draft red herring prospectus can lose ESOP eligibility unless Regulation 9A's retention exception applies
- One scheme cannot serve both worlds: a startup approaching listing must migrate its private company ESOP scheme into a SEBI-compliant structure well before its IPO filing, not after
Which Law Governs ESOPs for a Startup Versus a Listed Company?
Regulatory Foundation Phase
Every company issuing ESOPs in India, regardless of size or listing status, starts from the same statutory base: Section 62(1)(b) of the Companies Act, 2013, which permits a company with share capital to issue further shares to employees under an employee stock option scheme, and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, which sets the operating conditions, including eligibility, minimum vesting, disclosure and the register of options that must be maintained. This layer applies identically to a two-year-old startup and a fifty-year-old unlisted public company.
The divergence begins the moment a company's equity shares are listed on a recognised stock exchange. From that point, the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, notified on 13 August 2021 and commonly called the SBEB and SE Regulations, apply in addition to, not instead of, the Companies Act framework. These Regulations consolidated two older instruments, the SEBI (Share Based Employee Benefits) Regulations, 2014 and the SEBI (Issue of Sweat Equity) Regulations, 2002, into a single code covering six scheme types: Employee Stock Option Schemes, Employee Stock Purchase Schemes, Stock Appreciation Rights, General Employee Benefits Schemes, Retirement Benefit Schemes and Sweat Equity.
| Aspect | Startup / Unlisted Company | Listed Company |
|---|---|---|
| Primary governing law | Section 62(1)(b), Companies Act 2013 and Rule 12, Companies (Share Capital and Debentures) Rules, 2014 | Same Companies Act provisions, plus SEBI (SBEB and SE) Regulations, 2021 |
| Regulator involved | Registrar of Companies (MCA) only | MCA, SEBI and the recognised stock exchanges |
| Minimum vesting period | 1 year from date of grant | 1 year from date of grant, with immediate vesting on death or permanent incapacity |
| Promoter / large shareholder eligibility | Excluded, unless a DPIIT-recognised startup within 10 years of incorporation | Excluded in all cases, subject to a narrow Regulation 9A retention exception at IPO |
| Independent director eligibility | Not eligible | Not eligible |
| Shareholder approval | Special resolution, or ordinary resolution if the company is not in default of filings | Special resolution via postal ballot or e-voting, plus stock exchange in-principle approval |
| Trust framework | Optional, under Rule 16 of the Companies (Share Capital and Debentures) Rules, 2014 | Chapter III of the SBEB and SE Regulations, mandatory if secondary acquisition is used |
| Perquisite FMV at exercise | Category I Merchant Banker certification, Rule 3(8) or 3(9), Income Tax Rules | Average of opening and closing stock exchange price on exercise date |
| Tax deferral for employees | Available under Section 192(1C) for eligible DPIIT and Section 80-IAC startups | Not generally available |
Understanding which of these two tracks a company sits on, and preparing early for the transition between them, is the single most consequential decision in structuring an ESOP programme. Getting it wrong rarely surfaces immediately. It surfaces at the worst possible moment: during fundraising due diligence, at DRHP filing, or when a departing employee's exercise triggers a tax dispute.
Who Can Receive ESOPs? Eligibility Rules for Startups vs Listed Companies
Eligibility is where the two frameworks diverge most sharply, and where founders most often assume the rules are identical when they are not. The default position under both frameworks is restrictive: promoters, members of the promoter group, and independent directors are excluded from the definition of an eligible employee. What differs is the extent, and the exceptions, to that exclusion.
Startup / Unlisted Company Eligibility
Rule 12, Companies (Share Capital and Debentures) Rules 2014
10-Year Startup Carve-Out
The default exclusion under Rule 12 applies to an employee who is a promoter or belongs to the promoter group, and to a director who, directly or through a relative or body corporate, holds more than 10 percent of the company's outstanding equity shares. However, a proviso inserted in 2016 and extended in 2019 disapplies both exclusions entirely for a company recognised as a startup by the DPIIT, for a period of up to 10 years from the date of its incorporation or registration.
- A recognised startup can grant ESOPs to its founder-promoters and to directors holding more than 10 percent equity, something no other unlisted company can do
- Independent directors remain excluded even within this carve-out, since Section 149(9) of the Companies Act separately bars independent directors from stock options
- Once the 10-year window from incorporation lapses, the standard exclusions apply even if the company is still privately held and still DPIIT-recognised
Listed Company Eligibility
Promoters Excluded, No Shareholding Threshold
Regulation 9A Exception, September 2025
Regulation 2(1)(i) of the SBEB and SE Regulations, 2021 defines an employee to specifically exclude anyone who is a promoter or belongs to the promoter group, and separately excludes independent directors, with no minimum shareholding threshold attached. This is materially stricter than the unlisted company rule, which only bites once a director's holding crosses 10 percent. There is no startup-style time-bound carve-out at all under the SEBI framework.
- A founder who was eligible for ESOPs while classified purely as an employee loses that eligibility the moment a DRHP identifies them as a promoter, unless Regulation 9A applies
- Regulation 9A, inserted in September 2025, allows a founder reclassified as a promoter in a DRHP to retain and exercise ESOPs that were granted at least one year before the DRHP filing, on their original terms
- ESOPs granted after the founder is identified as a promoter remain impermissible regardless of Regulation 9A
Directors who are not promoters and not independent directors, whole-time or non-executive, remain eligible under both frameworks, as do permanent employees of the company and, under the 2021 SEBI amendment, employees of the company's holding, subsidiary or associate entities working in India or abroad. The 2021 Regulations also broadened the eligible employee definition to remove the word "permanent," allowing companies more flexibility to extend schemes to non-permanent staff working exclusively for the group.
Not Sure If Your Founders Qualify for the Startup ESOP Carve-Out?
We confirm DPIIT recognition status, the 10-year incorporation window, and Section 80-IAC eligibility before you finalise a promoter ESOP grant, so the grant survives scrutiny at your next funding round or audit.
How Is the ESOP Exercise Price Determined in a Startup vs a Listed Company?
A common assumption is that listed companies face pricing restrictions that startups do not. In practice, both an unlisted startup's board and a listed company's compensation committee, which under Regulation 5 of the SBEB and SE Regulations is ordinarily the company's existing Nomination and Remuneration Committee, have complete freedom to set the exercise price of an ESOP grant. Neither the Companies Act nor the SEBI Regulations prescribe a minimum ESOP pricing formula, unlike the pricing formulas that apply to a preferential allotment under Section 62(1)(c) or SEBI's ICDR Regulations. Companies in both categories routinely price options at or below the prevailing fair value to make the grant attractive, sometimes at nominal face value.
The real divergence sits not at grant, but at exercise, and it flows from how each type of company's fair market value is determined for tax purposes under Rule 3 of the Income Tax Rules, 1962.
Startup Exercise Pricing in Practice
Board Discretion at Grant
Merchant Banker FMV at Exercise
A startup's board sets the exercise price freely at grant, often close to the last funding round's per-share price, at a discount to it, or at nominal face value for early founding employees. The number that actually matters for tax purposes only crystallises at exercise, when a SEBI-registered Category I Merchant Banker certifies the fair market value used to compute the taxable perquisite.
Listed Company Exercise Pricing in Practice
Compensation Committee Discretion at Grant
Stock Exchange Price at Exercise
A listed company's compensation committee sets the exercise price freely at grant, frequently at the market price on the grant date or at a defined discount to it, formalised in the scheme document approved by shareholders. At exercise, the perquisite calculation simply uses the observable stock exchange price, removing any need for an independent valuer.
Shareholder Approval and Governance: Ordinary Resolution vs Special Resolution
Governance and Compliance Phase
Section 62(1)(b) of the Companies Act, 2013 requires shareholder approval of an ESOP scheme by special resolution, meaning at least 75 percent of the votes cast must favour the resolution. For a private company, however, an MCA exemption notification dated 5 June 2015 relaxes this requirement: a private company that is not in default of filing its annual returns or financial statements can approve an ESOP scheme by ordinary resolution, requiring only a simple majority. This is a meaningful procedural simplification available to most startups and unavailable to listed companies.
A listed company follows a considerably more involved governance path. The scheme must first be formulated by the Nomination and Remuneration Committee acting as the compensation committee, then recommended to the board, and then placed before shareholders for approval by special resolution, almost always conducted through postal ballot or e-voting under the Companies Act read with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Approval does not end the process. Before any grant is made, the company must file the scheme in the format prescribed under Part D of Schedule I to the SBEB and SE Regulations and obtain in-principle approval from the recognised stock exchanges for the shares that will eventually be listed on exercise. After each exercise event, a further notification in the format prescribed under Part E of Schedule I must be filed with the exchanges.
✔ Annual Compliance Unique to Listed Company ESOP Schemes
- Secretarial auditor certificate placed before shareholders at every Annual General Meeting, confirming the scheme has been implemented consistently with the SBEB Regulations and the shareholder resolution
- Board's Report disclosure of options granted, vested, exercised, lapsed and outstanding, along with the accounting method used and its impact on profit and earnings per share
- Material event disclosure to stock exchanges under Regulation 30 of the LODR Regulations where scheme changes or large grants qualify as material
- Adherence to trading window closures under the SEBI (Prohibition of Insider Trading) Regulations, 2015 for option exercise and any subsequent sale by designated persons
An unlisted startup's disclosure burden under Rule 12(9) is comparatively light: the Board's Report must disclose details of options granted, vested, exercised and lapsed, along with the money realised on exercise, the total number of options in force, and the fully diluted earnings per share computed under the ESOP scheme. There is no stock exchange filing, no secretarial auditor certification requirement specific to the scheme, and no insider trading regime to navigate, since Category unlisted shares are not traded on an exchange in the first place.
ESOP Valuation Requirements Across the Lifecycle: Who Values What, and When
Valuation and Taxation PhaseOf every difference between startup and listed company ESOP administration, valuation is the one where practitioners most often blend requirements that are actually separate. An ESOP passes through at least three distinct valuation moments, each governed by a different law, each potentially requiring a different professional, and each answering a different question. Conflating them is one of the most common and costly errors in ESOP compliance.
| Valuation Moment | Purpose | Startup / Unlisted Company | Listed Company |
|---|---|---|---|
| At grant | Setting the exercise price and scheme design | Board discretion, no statutory minimum price or mandatory external certificate | Compensation committee discretion, no statutory minimum price |
| For financial reporting | Ind AS 102 or ICAI Guidance Note expense recognition | Fair value method mandatory once Ind AS applies; intrinsic value survives only as a narrow fallback for smaller non-Ind AS entities | Fair value method under Regulation 15, read with Ind AS 102, which is mandatory for all listed companies |
| At exercise, for income tax | Computing the taxable perquisite under Section 17(2)(vi) | SEBI-registered Category I Merchant Banker certifies FMV under Rule 3(8) or 3(9) of the Income Tax Rules, certificate valid up to 180 days | FMV is the average of the opening and closing stock exchange price on the exercise date, no external certification needed |
| For sweat equity specifically | Valuing intellectual property or technical know-how contributed for shares | Registered valuer under Section 54, Companies Act and Rule 8, Companies (Share Capital and Debentures) Rules | IBBI-registered valuer, replacing merchant bankers with effect from 2 January 2026 following a December 2025 SEBI amendment |
The Income Tax Rules draw the listed versus unlisted distinction explicitly. For shares listed and traded on a recognised stock exchange, fair market value at exercise is the average of the opening and closing price on the exercise date, or, if not traded that day, the closing price on the nearest preceding trading day. For shares of an unlisted company, including every startup that has not yet listed, fair market value must be determined by a merchant banker registered with SEBI under Category I, using an accepted approach such as discounted cash flow or net asset value, and the certificate must not be older than 180 days from the date of exercise.
⚠️ A Merchant Banker Certificate and a Chartered Accountant's Valuation Are Not Interchangeable for This Purpose. For unlisted company ESOP perquisite calculation under Rule 3(8) or 3(9), only a SEBI-registered Category I Merchant Banker's certificate satisfies the requirement. A Chartered Accountant's valuation, while valid for many other Income Tax purposes such as Rule 11UA share transfer FMV, does not satisfy this specific rule. Companies that engage the wrong professional for this step frequently discover the gap only when the Income Tax Department scrutinises the perquisite figure years later.
Note that this specific ESOP perquisite valuation is governed by Rule 3 of the Income Tax Rules, 1962, not by Rule 11UA, which is a separate provision applicable to share transfers and issuances under Section 56(2)(x) and Section 50CA. For a detailed treatment of Rule 11UA fair market value mechanics, which frequently arise for the same startup in other share transactions, see our guide on share and securities valuation in India.
Preparing an ESOP Exercise Window for Your Startup?
We provide the Category I Merchant Banker-certified fair market value your company needs to compute perquisite tax correctly, within the 180-day validity window, coordinated with your payroll and TDS calendar.
ESOP Trusts: How Secondary Acquisition Rules Differ for Startups and Listed Companies
Both unlisted and listed companies may implement ESOPs directly, by issuing fresh shares to employees on exercise, or indirectly, through a trust that holds shares on behalf of employees pending vesting and exercise. The trust route is optional in an unlisted company and becomes mandatory in a listed company the moment secondary acquisition of existing shares, rather than fresh issuance, is used.
Startup ESOP Trusts
An unlisted company may set up an ESOP trust under Rule 16, subject to conditions substantially lighter than the listed company regime, including board and shareholder approval of the trust structure and standard restrictions under Section 67 of the Companies Act on a company financing the purchase of its own shares, from which an ESOP trust is specifically carved out as a permitted exception.
Listed Company ESOP Trusts
Both frameworks require the trust to be genuinely independent in its administration, with a trustee who is not conflicted, and both require the trust deed to specify how forfeited or unallotted options are to be dealt with. The listed company framework additionally requires the trust's shareholding to be disclosed separately in shareholding pattern filings, since regulators and analysts track ESOP trust holdings distinctly from promoter and public shareholding.
Taxation: Startup ESOP Deferral vs Ordinary Perquisite Tax for Listed Companies
ESOP taxation in India follows the same two-stage structure for every company, listed or not. At exercise, the difference between the fair market value of the share and the exercise price is taxed as a perquisite under Section 17(2)(vi), added to the employee's salary income and subject to TDS under Section 192 of the Income Tax Act, 1961, recodified as Section 392 under the Income Tax Act, 2025 for periods from 1 April 2026 onward, with the substantive computation unchanged. At sale, the difference between the sale price and that same fair market value is taxed as a capital gain, long term if the shares are held beyond 12 months for listed shares or 24 months for unlisted shares from the date of allotment.
The point of genuine divergence is timing, and it exists only for one category of company.
📌 Section 192(1C): The Startup-Only Tax Deferral
Employees of an eligible startup, meaning a company that is both DPIIT-recognised and holds a valid Inter-Ministerial Board certificate under Section 80-IAC, need not pay perquisite tax in the year of exercise. Instead, under Section 192(1C), the employer defers TDS to the earliest of three trigger events:
- 48 months from the end of the assessment year in which the shares were allotted, extended to 60 months for shares allotted on or after 1 April 2026 under the Income Tax Act, 2025
- The date the employee sells or transfers the allotted shares
- The date the employee ceases to be an employee of the company
The tax rate applied at the trigger point is the rate that was in force for the assessment year of allotment, not the year in which the deferral actually ends, which can materially benefit employees who were in a lower tax bracket at the time of exercise.
⚠️ DPIIT Recognition Alone Does Not Unlock the Deferral. A large share of Indian startups hold DPIIT recognition but have never applied for, or been granted, the separate Inter-Ministerial Board certificate required for Section 80-IAC eligibility. Without that certificate, employees of the startup do not qualify for the Section 192(1C) deferral, regardless of how the company otherwise describes itself. This is one of the most frequently missed conditions in startup ESOP tax planning.
⚠️ Missing a Deferral Trigger Date Is Treated as a TDS Default. If an employee leaves the company or sells shares while tax remains deferred under Section 192(1C), the employer must deduct TDS within 14 days of that trigger event. Employers who track only the 48-month or 60-month outer limit, and miss an earlier exit or sale trigger, face a TDS default under Section 201, along with interest and, in serious cases, penalty proceedings, even though the underlying deferral itself was lawfully claimed.
Listed companies fall outside this deferral almost entirely. A company generally loses Section 80-IAC eligibility once its turnover, structure, or the passage of time takes it beyond the eligibility conditions well before it reaches the scale required for listing, and in any case eligibility is assessed independently of listing status. As a practical matter, listed company employees pay perquisite tax in the year of exercise, deducted by the employer as ordinary salary TDS, with no deferral mechanism of comparable effect available under current law.
Accounting and Disclosure: Ind AS 102 for Startups vs SEBI-Mandated Disclosure for Listed Companies
Financial reporting for ESOPs converges more than founders expect, though the disclosure obligations layered on top of that accounting remain sharply different. Under Ind AS 102, the fair value method is effectively the only method available for equity-settled share-based payments, with intrinsic value permitted only in the narrow circumstance where fair value genuinely cannot be estimated reliably. Any company that meets the Ind AS applicability thresholds under the Companies (Indian Accounting Standards) Rules, whether by size, by voluntary early adoption ahead of an anticipated fundraising round or listing, or by group consolidation requirements, must apply fair value accounting to its ESOP expense regardless of whether it is listed.
Smaller startups not yet covered by Ind AS may instead follow the ICAI Guidance Note on Accounting for Employee Share-based Payments, which historically permitted a choice between the intrinsic value method and the fair value method, with mandatory disclosure of the difference in compensation cost and its impact on profit and earnings per share if intrinsic value is chosen. In practice, the intrinsic value option has become a rare fallback even here, since it materially understates the true cost of options that are granted at or near fair value.
Listed companies additionally operate under Regulation 15 of the SBEB and SE Regulations, which requires compliance with applicable accounting standards, meaning Ind AS 102 fair value accounting for virtually every listed entity, layered with a further set of disclosure obligations that unlisted companies do not carry.
✔ Disclosure Obligations That Apply Only to Listed Company ESOP Schemes
- Method used to account for the scheme, fair value or intrinsic value, disclosed in the Board's Report and financial statement notes
- Where intrinsic value is used in the rare permitted case, the difference in employee compensation cost versus fair value, and its impact on profit and diluted earnings per share, disclosed explicitly
- Scheme-wise disclosure of options outstanding, vested, exercised and lapsed at each financial year end, cross-referenced to the shareholder-approved scheme document
- Use of ESOP allotments toward Minimum Public Shareholding compliance, where relevant, under SEBI's February 2023 circular allowing up to 2 percent of paid-up equity capital to count toward the public float requirement
What Happens to Founder ESOPs When a Startup Goes Public?
Exit and IPO Transition Phase
The most consequential ESOP moment for many founders is not grant or exercise, but the filing of the draft red herring prospectus. IPO disclosure norms require founders, and anyone who fits the definition of promoter or promoter group, to be identified as such in the DRHP. The difficulty is immediate: the SBEB and SE Regulations exclude promoters and promoter group members from ESOP eligibility outright, with no reference to when that classification occurred. Read literally, a founder who received ESOPs years earlier as an ordinary employee could be forced to forfeit those options the instant the DRHP is filed, purely because of a change in regulatory label, not because of any change in the substance of how the options were earned.
This tension had been building for years and was addressed through a SEBI consultation process culminating in an amendment to the SBEB and SE Regulations in September 2025. The new Regulation 9A allows a founder who is subsequently identified as a promoter in a DRHP, at least one year after the relevant ESOP grants were made, to retain and exercise those pre-existing grants on their original terms. The exception is narrowly drawn: it protects options already granted before the reclassification and the one-year gap, not any fresh grants made afterward, and it does not disturb the separate, longstanding rule that promoters cannot receive new ESOPs once they are already classified as such.
✔ What a Startup Should Confirm Before Filing a DRHP
- Which existing ESOP grant dates fall more than one year before the anticipated DRHP filing date, and therefore qualify for Regulation 9A retention
- Whether any founder holds unvested or ungranted options that were promised but not yet formally granted, since only granted options are protected
- Whether the company's existing private company ESOP scheme, approved under Section 62(1)(b) by ordinary or special resolution, needs to be migrated into, or run alongside, a fresh SBEB-compliant scheme for post-listing grants
- Whether the company's ESOP trust, if one exists, needs to be restructured to satisfy Chapter III of the SBEB Regulations before listing
The related question of whether shares received on exercise of pre-IPO ESOPs can be sold in the IPO itself as part of an Offer for Sale is governed separately by the SEBI ICDR Regulations' holding period rules, which have also been the subject of recent SEBI review specifically in the context of founder-held ESOP shares. Companies planning a listing within the next 12 to 24 months should treat ESOP scheme migration as part of the same workstream as their broader transaction readiness and due diligence preparation, not as an afterthought handled in the weeks before DRHP filing.
Approaching an IPO With Founder ESOPs Still Outstanding?
We help pre-IPO companies map every existing ESOP grant against the Regulation 9A retention window, restructure trust and scheme documentation for SBEB compliance, and coordinate valuation across the transition from merchant banker FMV to listed market pricing.
Setting Up a Compliant ESOP Scheme: The Process at Each Stage
Regardless of whether a company is an unlisted startup or already listed, a compliant ESOP scheme is built through the same six-step sequence. What changes at each step is the specific rule that applies.
1. Confirm Eligibility Before Drafting the Scheme
Identify every proposed grantee against the promoter, promoter group and independent director exclusions. For a startup, separately confirm DPIIT recognition and the 10-year incorporation window before including any founder or large shareholder-director. For a listed company, confirm no proposed grantee is currently classified as a promoter or promoter group member.
2. Draft the Scheme and Set Pricing Freedom
Fix the exercise price, vesting schedule of at least one year, and exercise window. Both an unlisted company's board and a listed company's compensation committee have full pricing freedom at this stage, so the decision should be driven by retention design rather than any statutory floor.
3. Obtain the Correct Shareholder Approval
A private company not in default of filings can proceed by ordinary resolution. A listed company must pass a special resolution, ordinarily through postal ballot or e-voting, and must file the scheme with the stock exchanges for in-principle approval before any grant is made.
4. Decide Whether a Trust Structure Is Needed
A direct-issuance scheme avoids trust mechanics entirely for either type of company. If secondary market acquisition is preferred, a startup uses the lighter Rule 16 framework, while a listed company must satisfy Chapter III of the SBEB Regulations, including the 2 percent annual and 5 percent cumulative acquisition caps.
5. Line Up the Correct Valuation Professional for Exercise
For an unlisted company, engage a SEBI-registered Category I Merchant Banker ahead of each exercise window, with the certificate timed to stay within its 180-day validity. For a listed company, no external valuer is needed, since the stock exchange price on the exercise date is used directly.
6. Maintain the Ongoing Register and Disclosures
Both frameworks require a register of options granted, vested, exercised and lapsed. A listed company additionally requires an annual secretarial auditor certificate at the AGM, stock exchange notification after every exercise event, and Regulation 30 disclosure of any material scheme change.
📁 A Recent Engagement
B2B SaaS Startup
DPIIT Recognised, Section 80-IAC Certified
Pre-IPO ESOP Migration
A DPIIT-recognised technology startup approached us roughly 18 months ahead of a planned listing, having granted ESOPs to its three founders under the Rule 12 startup carve-out during its first eight years of operation. Its existing ESOP scheme had been approved by ordinary resolution as a private company in default-free standing, administered without a trust, and priced using annual Category I Merchant Banker certificates for each exercise window.
Our review found that roughly 40 percent of the founders' outstanding options had been granted within the twelve months preceding the anticipated DRHP filing date, placing them outside the Regulation 9A retention window and at direct risk of forfeiture on promoter reclassification. We worked with the company's board and legal counsel to accelerate vesting schedules within the bounds the existing scheme allowed, ensured the qualifying grants were properly documented with contemporaneous grant-date evidence, and designed a parallel SBEB-compliant scheme for all post-listing grants, including a trust structure sized within the 2 percent annual secondary acquisition cap. The company entered its DRHP process with a clean, documented position on every founder grant, avoiding what would otherwise have been a late-stage scramble to justify option retention to the lead merchant banker and SEBI.
Common Mistakes in Startup vs Listed Company ESOP Structuring
❌ Assuming DPIIT recognition alone unlocks the Section 192(1C) tax deferral
The deferral additionally requires a Section 80-IAC Inter-Ministerial Board certificate, a separate application most DPIIT-recognised startups never complete.
Fix: Confirm the company holds a live Section 80-IAC certificate before communicating deferral eligibility to employees, and revisit it at each certificate renewal cycle.
❌ Applying the unlisted company's 10 percent shareholding threshold to a listed company scheme
SEBI's promoter and promoter group exclusion under the SBEB Regulations applies regardless of shareholding percentage, unlike the unlisted company rule under Rule 12.
Fix: Treat every promoter and promoter group member as categorically excluded once the company lists, irrespective of how small their holding is.
❌ Using a Chartered Accountant's certificate instead of a Category I Merchant Banker's for unlisted ESOP perquisite FMV
Rule 3(8) and 3(9) of the Income Tax Rules specifically require merchant banker certification for this calculation, not a CA valuation, even though a CA can certify FMV for other purposes such as Rule 11UA.
Fix: Engage a SEBI-registered Category I Merchant Banker specifically for exercise-window FMV, and track each certificate's 180-day validity against the company's actual exercise calendar.
❌ Forgetting stock exchange in-principle approval before a listed company grant
A grant made without prior in-principle approval under Part D of Schedule I to the SBEB Regulations, and without the corresponding Part E notification after exercise, exposes the company to regulatory objection at the time shares are due for listing.
Fix: Build stock exchange filing into the ESOP administration calendar as a mandatory pre-grant and post-exercise step, not a one-time compliance item.
❌ Leaving founder ESOP restructuring until the DRHP drafting stage
Regulation 9A's one-year gap requirement between the grant date and DRHP filing means late restructuring cannot fix grants made too close to the filing date.
Fix: Map every founder's outstanding grant against the anticipated DRHP timeline at least 18 to 24 months before a planned listing, not after the process has already begun.
❌ Continuing to administer ESOPs under the private company scheme after listing
A scheme approved by ordinary or special resolution as a private company under Section 62(1)(b) does not automatically satisfy the SBEB and SE Regulations once the company lists, and continuing to grant under it post-listing creates a compliance gap.
Fix: Treat scheme migration to a SEBI-compliant structure as a mandatory pre-listing workstream, formally approved by the post-listing board and shareholders before any further grants are made.
Closing Summary: The Same Instrument, Two Different Rulebooks
An ESOP is the same basic instrument whether it is granted by a ten-person startup or a company listed on the NSE, but the rulebook governing it changes completely the moment shares are admitted to trading. Eligibility widens for founders during the startup years and then narrows sharply at listing. Shareholder approval simplifies to an ordinary resolution for many private companies and then hardens into a special resolution with stock exchange oversight. Valuation shifts from a merchant banker's certified fair market value to a directly observable market price. Tax deferral, available only to eligible DPIIT and Section 80-IAC startups, disappears once that eligibility lapses. Founders and finance teams who treat these as one continuous set of rules, rather than two related but distinct frameworks connected by a specific transition point, are the ones most likely to discover a compliance gap at the worst possible time, during due diligence, at DRHP filing, or in an Income Tax assessment years after the exercise event. At Elite Valuation, our ESOP practice is built around exactly that transition, from first grant through IPO-ready restructuring, so that each stage is compliant with the rulebook that actually applies to it.
Structuring or Restructuring an ESOP Programme?
Eligibility review → Scheme design and shareholder approval → Trust structuring → Exercise-window valuation → Pre-IPO SBEB migration. One practice, built for founders at every stage from first grant to listing.
Frequently Asked Questions — ESOP for Startups vs Listed Companies
CA Sagar Shah, Founder
Mr Sagar Shah is the Founder of Elite Valuation and leads the firm’s Valuation and Advisory practice. With over 15+ years of professional experience.
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