ESOP Grant Letters in India: The Scheme, the Contract and the Register, and the Dates That Cause Disputes
An ESOP has three layers: the scheme approved by shareholders, the grant letter that is a contract with each employee, and the register that tracks vesting and exercise. What the Companies Act and rule 12 require, what the grant letter must say, and how to stop the disputes that arise when employees leave.
Startups issue ESOPs as a recruiting tool and discover their contractual weight when an employee resigns with half-vested options and a different memory of the exercise window. The scheme sets the rules, the grant letter makes them a contract, and the register is the record that settles arguments. This guide covers all three for Indian companies, with the law behind each. Position as of October 2026.
Layer 1: The scheme
Under section 62(1)(b) of the Companies Act, 2013, a company may offer shares to employees under a scheme of employees' stock option, subject to a special resolution of shareholders and the conditions in rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. Rule 12 requires, among other things, a minimum period of one year between grant and vesting, disclosure of the scheme's terms in the explanatory statement, board disclosures in the directors' report, maintenance of a register of employee stock options (Form SH-6), and sets out who is an eligible employee (excluding, for most companies, promoters and directors holding more than 10%, with relaxations for start-ups recognised by DPIIT for a period). ****
The scheme should define: eligibility, the pool size, the grant process, vesting (schedule, cliff, acceleration), exercise price and period, treatment on resignation, termination for cause, death and disability, change of control, and amendment powers.
Layer 2: The grant letter
The grant letter is the contract with the individual. It must align with the scheme and should state:
- Grant date and number of options.
- Exercise price and how it was determined (a registered valuer's report is standard; tax consequences on exercise and sale follow).
- Vesting schedule: the cliff (not less than one year under rule 12), the periodic vesting thereafter, and whether vesting is time-based, performance-based or both.
- Exercise period: how long after vesting the employee may exercise, and the shorter window after leaving (commonly 90 days for resignation; longer or accelerated for death or disability; forfeiture on termination for cause).
- Mechanics: notice of exercise, payment, issue of shares, lock-in if any.
- Tax: perquisite tax on exercise (section 17(2) of the Income-tax Act, 1961) and the deferral available to eligible start-ups under section 192(1C); capital gains on sale. ****
- Acceptance: the employee signs; the company countersigns.
Layer 3: The register and the dates
Rule 12 requires the register of options in Form SH-6. In practice the register must also drive the dates:
| Event | Date to track |
|---|---|
| Grant | Grant date; acceptance deadline |
| Cliff | Grant date + 12 months |
| Vesting tranches | Each vesting date |
| Exercise window (in service) | Vesting date + exercise period |
| Exit | Last working day; post-exit exercise deadline |
| Expiry | Latest exercise date |
| Change of control | Acceleration trigger |
Most ESOP disputes are about the post-exit window. The grant letter should state it in days from the last working day, the company should notify the employee of it in writing at exit, and the register should show it.
Execution
Grant letters can be e-signed (sections 5 and 10A of the IT Act, 2000); use Aadhaar eSign or a platform signature with OTP for employees and DSC or Aadhaar eSign for the company. Keep each grant letter, the acceptance and the audit trail against the employee record and the register. Some states charge stamp duty on the agreement; check and stamp where applicable.
Common mistakes
- Grant letters issued before the shareholders' special resolution.
- Vesting cliffs shorter than one year.
- Exercise windows that exist only in the scheme, not in the letter the employee read.
- No written notice of the post-exit deadline.
- Register not reconciled to the cap table before a funding round.
Where Legatio fits. Legatio generates grant letters from the scheme and the grant data, runs bulk e-signature with employee acceptance tracking, and holds vesting and exercise dates as alerts to HR and the company secretary. The scheme design and tax positions are for your advisers.
Position stated as of October 2026. General information, not legal or tax advice.