Integrated Framework under the Companies Act, 2013 and the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021
ESOPs are often looked at as just an employee incentive tool, but in reality, they say a lot about how seriously a company takes governance and compliance. It’s not only about granting options—right from structuring the scheme and taking approvals to tracking vesting, exercise and eventual allotment, the entire lifecycle needs to be properly aligned with the law.
On the legal side, Section 62(1)(b) of the Companies Act, 2013, read with Rule 12 of the Share Capital Rules, lays down the basic framework for issuance of ESOPs. For listed companies, this is further supplemented by the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, which bring in an additional layer of approvals, disclosures and oversight. What we often see in practice is that companies tend to focus on one framework and miss out on the other, which is where most compliance gaps start.
Even small lapses—like not maintaining proper grant documentation, delays in allotment after exercise, or incomplete disclosures—can lead to regulatory issues. These are not always intentional, but they do reflect gaps in internal processes and monitoring.
In this article, we have tried to cover the key compliance requirements under both the Companies Act, 2013 and the SBEB Regulations, along with some common observations from a secretarial audit perspective, to highlight where companies typically go wrong and what needs more attention.
Key Compliance Requirement under the Companies Act,2013
| Section Compliance Mandate | |
| 2(37)
Definition |
Employees’ stock option means the option given to the Directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such Directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price. |
Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014
| Sub Rule Compliance Mandate | |
| 1 | A company, other than a listed company, may offer shares to employees under an ESOP only after approval of shareholders by special resolution. |
| Explanation to Sub Rule 1 | “Employee” means-
a) a permanent employee of the company who has been working in India or outside India; or b) a director of the company, whether a whole-time director or not but excluding an independent director; or c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company but does not include- i. an employee who is a promoter or a person belonging to the promoter group; or |
| ii. a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.
(in case of a startup company, the conditions mentioned in sub-clause (i) and (ii) shall not apply upto 10 year from the date of its incorporation or registration.) |
|
| 2 | Explanatory statement to the ESOP special resolution notice shall disclose key scheme details including number of options, eligible employees, eligibility criteria, vesting/exercise terms, pricing, lock-in, per employee limits, valuation method, lapse conditions, exit/resignation treatment, and compliance with applicable accounting standards. |
| 3 | The company may determine the exercise price of ESOPs in accordance with applicable accounting policies. |
| 4 | The approval of shareholders by way of separate resolution shall be obtained by the company in case of-
(a) grant of option to employees of subsidiary or holding company; or (b) grant of option to identified employees, during any one year, equal to or exceeding one percent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of option. |
| 5 | Unexercised ESOP terms may be varied by special resolution, provided no prejudice is caused to option holders, with notice disclosing full details, rationale, and beneficiaries of the variation. |
| 6 | Minimum one year shall elapse between grant and vesting of options; company may prescribe lock-in on shares issued upon exercise; employees shall have no dividend, voting, or shareholder rights until shares are allotted on exercise. |
| 9 | Board’s Report shall disclose ESOP details including options granted, vested, exercised, lapsed, shares issued, exercise price, variations, money realised, options outstanding, and employee-wise grants to KMPs and specified employees. |
| 10 | Company shall maintain Register of Employee Stock Options in Form SH-6, recording grants under Section 62(1)(b), at the registered office or other Board-approved place, duly authenticated by the Company Secretary or authorised person. |
| 11 | Where the equity shares of the company are listed on a recognized stock exchange, the Employees Stock Option Scheme shall be issued, in accordance with the regulations made by the SEBI in this behalf. |
SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021
| Regulation | Compliance Mandate |
| Reg 3 | A company may implement a scheme(s) either directly or by setting up an |
| Implementation | irrevocable trust. |
| of Scheme | |
| through Trust |
| Ensure that unappropriated shares acquired by the trust through secondary acquisition are appropriated against employee grants within the prescribed timeline—by the end of the subsequent financial year (or second subsequent financial year with approval of the Compensation Committee/NRC). | |
| Reg 4 Eligibility | An employee shall be eligible to participate in the schemes of the company as determined by the compensation committee. |
| Reg 5 Compensation Committee/ NRC | · Company shall constitute a compensation committee for administration and superintendence of the schemes. Where the scheme is being implemented through a trust the compensation committee shall delegate the administration of such scheme(s) to the trust.
· The company may also opt to designate its nomination and remuneration committee as the compensation committee for the purposes of these regulations. · The Compensation Committee is required to formulate the detailed terms and conditions of the scheme, including matters specified under Part B of Schedule I of the SBEB Regulations. |
| Reg 6 Shareholder’s Approval | No scheme can be implemented without shareholders’ approval by special resolution. The explanatory statement must contain disclosures prescribed under Part C of Schedule I. |
| Reg 7 Variation of Terms of Scheme | Any variation in the terms of an existing scheme requires shareholders’ approval by special resolution, provided such changes are not prejudicial to employees. However, changes made solely to meet regulatory requirements do not require shareholder approval. Repricing of unexercised options/SARs/shares is also permitted with shareholder approval, subject to employee interest safeguards. |
| Reg 13 Certificate from Auditors | The Board is required to place before shareholders at every AGM a certificate from the Secretarial Auditor confirming that the scheme has been implemented in compliance with the SBEB Regulations and the shareholders’ approved resolution. |
| Reg 14 Disclosures | In addition to disclosures required under the Companies Act, 2013, the Board’s Report/Annual Report must also disclose details of the scheme
as prescribed under Part F of Schedule I of the SBEB Regulations. |
| Reg 15 Accounting Policies | Companies implementing share-based benefit schemes must comply with the applicable accounting standards prescribed under Section 133 of the Companies Act, 2013, including relevant Guidance Notes on Accounting for Employee Share-Based Payments issued from time to
time. |
Adjudication Orders on ESOP Compliance Failures
While ESOPs are an effective employee retention tool, improper implementation can attract regulatory action. Recent orders by ROC and SEBI highlight that non-compliance with the Companies Act, 2013 and applicable SEBI regulations may result in penalties and enforcement action. The cases below provide a snapshot of key compliance lapses and regulatory outcomes.
| Company | Date of Order | Authority | Provision Violated | Nature of Non-Compliance | Penalty (includes penalty for other violations) |
| Krazzy Fin | 27th | Registrar | Section | The company | Penalty of |
| Private | March | of | 62(1)(b) of | allotted 216 equity | ₹1,00,000 |
| Limited | 2024 | Companie, | the | shares under ESOP | imposed on |
| Gujarat, | Companies | before completion | the company | ||
| Dadra & | Act, 2013 read | of the mandatory | and ₹25,000 | ||
| Nagar | with Rule | minimum vesting | each on its | ||
| Haveli | 12(6)(a) of | period of one year, | directors. | ||
| the | resulting in | ||||
| Companies | premature | ||||
| (Share Capital | allotment under its | ||||
| and Debentures) | ESOP 2021 Scheme. | ||||
| Rule, 2014 | |||||
| Bharti | 27th | Securities | Reg 3(12) of | ESOP Trust failed to | Monetary |
| Infratel | June | and | SEBI (Share | appropriate/sell | Penalty |
| Limited | 2022 | Exchange | Based | surplus | imposed |
| (now known | Board of | Employee | unappropriated | under section | |
| as: Indus | India | Benefits and | shares (5,32,862 | 15HB of SEBI | |
| Towers Limited) | (SEBI) | Sweat Equity) Regulations, | shares) within the prescribed timeline. | Act. | |
| 2021 | |||||
| Bodhtree | 15th | Securities | Multiple | Misuse of employee | Multiple |
| Consulting | March | and | violations | benefit trust | penalties |
| Limited | 2022 | Exchange | including | shares, improper | imposed on |
| Board of | Regulations | transfer of trust | company, trust | ||
| India | 3(4), 3(6), | shares, disclosure | and connected | ||
| (SEBI) | 3(9), 5, 6, 13, | lapses and alleged | individuals | ||
| 15 & 22(1) of | fraudulent | under SEBI | |||
| SBEB | practices involving | Act/SCRA. | |||
| Regulations, | employee benefit | ||||
| SEBI circulars | trust shares. | ||||
| and PFUTP | |||||
| Regulations. | |||||
| Guvi Geek | 9th | Registrar | Section | Granted 327 ESOP | ROC imposed |
| Network | February | of | 62(1)(b) of | options exceeding | adjudication |
| Private Limited | 2023 | Companies
, Tamil |
the Companies | 1% of issued capital to | penalty on company and |
| Nadu, | Act, 2013 r/w | identified | officers in | ||
| Chennai | rule 12 of | employees without | default. | ||
| Companies | obtaining separate | ||||
| (Share Capital | shareholder | ||||
| and Debentures) | approval. | ||||
| Rules, 2014 | |||||
| Wurknet | 17th | Registrar | Section | Required | ROC imposed |
| Private | Nov, | of | 62(1)(b) r/w | disclosures | penalty on |
| Limited | 2023 | Companies | Rule 12 of | regarding ESOP | company and |
| , Mumbai | Companies | scheme were not |
| (Share Capital and Debentures) Rules, 2014 | included in the explanatory statement/EGM notice for
shareholder approval. |
officers in default. | |||
| Vikas | 28th | Securities | SEBI (Share | Misleading ESOP | Penalty of Rs. |
| Proppant | February | and | Based | disclosure and | 25,00,000 |
| and Granite Limited | 2023 | Exchange Board of | Employee Benefits and | misuse of SBEB Regulations — | imposed on Noticee No.1 & |
| India | Sweat Equity) | ESOP shares (85 | 2, and penalty | ||
| (SEBI) | Regulations, | lakh) were granted | of Rs. | ||
| 2021 and | entirely to two | 10,00,000 | |||
| other | senior KMPs (CFO | imposed on | |||
| regulations | and Compliance | Noticee No. 3 | |||
| Officer), sold within a couple of months | & 4 | ||||
| of allotment, with | |||||
| proceeds routed | |||||
| back to related | |||||
| group entities; the | |||||
| company | |||||
| simultaneously | |||||
| made a false | |||||
| disclosure in its | |||||
| Annual Report that | |||||
| no ESOP had been | |||||
| issued to any senior | |||||
| managerial | |||||
| personnel. | |||||
| One97 | 30th | Registrar | Section | ESOPs were | ROC held that |
| Communicat | Nov, | of | 62(1)(b) of | granted to a person | there was a |
| ions Limited | 2021 | Companies
, NCT of |
the Companies | who became
ineligible under |
violation, but refused to |
| Delhi and | Act, 2013 read | revised Companies | impose | ||
| Haryana | with Rule 12 | Act provisions | penalty under | ||
| of the | (relative of | Section 454 | |||
| Companies | promoter category | because the | |||
| (Share Capital | issue). | default pre- | |||
| and | dated the | ||||
| Debentures) | 21.12.2020 | ||||
| Rules, 2014 | amendment—therefore, the | ||||
| company was | |||||
| asked to opt | |||||
| for | |||||
| compounding | |||||
| instead of | |||||
| adjudication | |||||
| penalty. |
Insight
These cases reflect that ESOP compliance extends far beyond merely obtaining shareholder approval for adopting a scheme. Regulators have highlighted lapses relating to employee eligibility, vesting timelines, disclosures, trust operations, and utilisation of shares. The broader takeaway is clear—ESOPs must be implemented with strong procedural discipline, as even seemingly technical lapses can lead to significant regulatory consequences.
CS Suresh Pandey
Practising Company Secretary
SPG & Associates
9968300649
suresh@spgindia.co.in
Coming Up in Edition 11: Common Non-Compliances in Auditor Appointment, Resignation & Reporting
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