Engagement
ESOP and cap table compliance for private companies
Last reviewed 07 November 2026
ESOP schemes, grants, exercise and the cap table that follows.
In short
A private company issues employee stock options under section 62(1)(b) of the Companies Act, 2013 and rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. The scheme needs a special resolution of the shareholders, filed in MGT-14 within 30 days. Options vest after at least one year, are recorded in the register in Form SH-6, and shares allotted on exercise are reported in PAS-3.
Overview
An ESOP lets a company give employees the right to buy its shares later at a price fixed today. For a private company, the scheme is approved by the shareholders by special resolution, and the explanatory statement sets out the scheme's terms: the total options, who is eligible, the vesting and exercise periods, the exercise price or the formula for it, and the lock-in, if any.
Options go to employees and to directors who are not independent directors. An employee who is a promoter, or a director holding more than 10% of the company's equity, is not eligible, except in a startup recognised by DPIIT, for ten years from its incorporation. Options vest after a minimum of one year, cannot be transferred, and lapse in line with the scheme if not exercised.
The cap table changes at each step. The practice keeps the scheme, the board approvals, the SH-6 register and the allotments on exercise in line with each other, so that the share capital in the company's records matches what is filed with the Registrar.
Key Deliverables
- Drafting the ESOP scheme and the explanatory statement
- Board and shareholder resolutions, and MGT-14 within 30 days
- Grant letters and the register of employee stock options (SH-6)
- Allotment on exercise, share certificates or demat credit, and PAS-3
- Disclosures in the board's report
- Cap table reconciliation before a funding round
Documents & E-Forms
- MGT-14
- SH-6
- PAS-3
When to Engage
Before the first grant is promised to an employee, and again before a funding round, when investors ask for a clean cap table.
Typical turnaround: Scoped in the engagement letter.
Frequently Asked
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