In short: An Employee Stock Option Plan (ESOP) gives eligible employees the right to acquire company shares at a fixed exercise price, subject to vesting, under Section 62(1)(b) of the Companies Act, 2013 read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. For Jaipur’s gems and jewellery export houses, hospitality groups, Mahindra World City units and a growing base of technology and DPIIT-recognised startups, the two decisions that determine whether an ESOP actually works are the valuation used at grant and exercise, and the tax treatment of the resulting perquisite and capital gain.
CA Murli Chandak, an IBBI-Registered Valuer (Securities or Financial Assets, registration IBBI/RV/07/2021/14408) advising Jaipur and Rajasthan businesses, works on ESOP scheme design, valuation, benefits assessment and documentation. This page sets out the ESOP lifecycle, what changed in valuation requirements through 2025-26, the two-stage tax framework with worked examples, and what an ESOP consultant in Jaipur actually does.
1. Contents
- Why Jaipur businesses are turning to ESOPs
- What is an ESOP: the five-stage lifecycle
- What changed for ESOP valuation in 2025-26
- Legal framework: unlisted companies and listed companies
- Who values what: the ESOP certification matrix
- How ESOPs are taxed: the two-stage framework, with worked examples
- ESOP valuation: equity value versus option value
- Designing a tax-efficient, employee-friendly ESOP
- ESOPs for Jaipur startups, MSMEs and family-owned businesses
- What CA Murli Chandak’s ESOP advisory covers
- Documents required and how the engagement runs
- Common mistakes to avoid
- Frequently asked questions
2. Why Jaipur Businesses Are Turning to ESOPs
Jaipur’s ESOP work rarely looks the same twice in CA Murli Chandak’s practice. Across eight-plus years and 300-plus valuation engagements, the schemes that cross his desk from Rajasthan range from a gems and jewellery exporter granting its first options to a senior export manager, to a Mahindra World City technology unit matching a metro compensation package, to an early-stage fintech founder sizing a pool ahead of a funding round. What these have in common is not sector — it is the two decisions that actually determine whether the scheme works: the valuation used at grant and exercise, and the tax treatment of the resulting perquisite and capital gain.
An ESOP addresses this by giving eligible employees a right to participate in the company’s future value, rather than relying on cash compensation alone. That right, however, is not the same as a share. It is a contractual entitlement that matures through vesting and exercise, and its actual economic value depends on how the underlying equity and the option itself are valued, and on how the resulting benefit is taxed. Treating an ESOP as a documentation exercise rather than a financial one is where most implementation problems in closely held Rajasthan companies originate.
CA Murli Chandak brings together the scheme design, valuation and tax threads personally, rather than routing the engagement through a large generalist team, so that the company’s commercial objective — retention, talent acquisition or succession planning — is supported by a structure that will hold up under audit, investor due diligence or a later tax assessment.
3. What Is an ESOP: The Five-Stage Lifecycle
An ESOP grant does not make an employee a shareholder. It creates a right that matures in stages, and each stage has a different legal and tax consequence.
| Stage | What happens |
|---|---|
| 1. Grant | The company allocates a specified number of options to an eligible employee under its approved ESOP scheme, fixing the exercise price and vesting schedule. No shares change hands at this stage. |
| 2. Vesting | The employee earns the right to exercise by completing the service (and, where applicable, performance) conditions attached to the grant. The minimum vesting period is one year from the date of grant, under Rule 12(6)(a) of the Companies (Share Capital and Debentures) Rules, 2014. |
| 3. Exercise | The employee pays the exercise price for vested options and completes the exercise formalities. This is also the point at which the taxable perquisite — the difference between fair market value (FMV) and exercise price — is computed. |
| 4. Allotment | The company allots or transfers the underlying shares. The employee becomes a shareholder in respect of those shares, with the rights attaching to that class of security. |
| 5. Sale or exit | The employee realises value through a buy-back, secondary sale, listing event or another permitted transaction, subject to the company’s liquidity mechanisms. Capital gains tax applies on this leg, separately from the exercise-stage perquisite. |
The distinction between stages 1 and 4 is where most employee misunderstanding sits: a grant of 1,500 options is not 1,500 shares, and its ultimate value depends on the company’s performance between grant and exit, the exercise price fixed at grant, and the FMV determined at exercise.
4. What Changed for ESOP Valuation in 2025-26
Three developments changed the compliance picture for ESOPs materially between late 2025 and mid-2026.
4.1 SEBI now requires a Registered Valuer, not a Merchant Banker — for listed-company sweat equity
The SEBI (Share Based Employee Benefits and Sweat Equity) (Second Amendment) Regulations, 2025, notified 3 December 2025 and effective 2 January 2026, redefined “valuer” under Regulation 2(1)(ww) to mean a registered valuer under Section 247 of the Companies Act, 2013, and Regulation 34(1) now requires an independent Registered Valuer, not a merchant banker, to value the know-how, intellectual property rights or value addition underlying a listed company’s sweat equity issuance. This is narrower than it is sometimes reported: Regulation 34 sits in the sweat equity chapter of the SBEB Regulations and governs sweat equity shares issued under Section 54 of the Companies Act, 2013 — it does not touch the valuation of ordinary employee stock option (ESOS) grants, which is what most schemes actually use. A nine-month transition applies to merchant-banker assignments already underway, running from the 2 January 2026 effective date.
For the small number of listed Rajasthan companies that issue sweat equity specifically, this shifts the valuation certificate from a merchant banker to an IBBI-Registered Valuer. It does not change how a standard ESOS grant is valued: that continues to run through the company’s own scheme design for the Ind AS 102 accounting charge, and a Category I Merchant Banker for the exercise-stage tax FMV under Rule 15(6) (Section 6 below).
4.2 Jaipur’s own filing jurisdiction did not move
Rajasthan-registered companies file with the Registrar of Companies, Jaipur, whose jurisdiction covers the whole state and was not split in the nationwide Ministry of Corporate Affairs field-office realignment that took effect from 16 February 2026. The Regional Director for Rajasthan continues to sit at the Regional Director (North-Western Region), headquartered at Ahmedabad, alongside Gujarat, Madhya Pradesh and Dadra and Nagar Haveli. Rajasthan company law matters, including a scheme of arrangement that touches an ESOP pool restructuring, are heard at the NCLT Jaipur Bench, in operation since 1 July 2018. A routine ESOP grant under Section 62(1)(b), however, is approved by the company’s shareholders through a special resolution and does not itself require Regional Director or NCLT approval — those forums come into play for schemes of arrangement, capital reductions and similar transactions, not for the grant itself. A fuller picture of registered-valuer engagements and MCA/NCLT jurisdiction for Jaipur and Rajasthan companies is set out in our Registered Valuer in Jaipur guide.
4.3 FEMA pricing for Jaipur’s export-facing businesses
Jaipur’s gems and jewellery export houses, and any Mahindra World City unit with a foreign parent or non-resident shareholder, sit closer to FEMA than most ESOP-issuing companies elsewhere in the country. Where an ESOP-linked transaction also touches FEMA pricing — for example, a non-resident employee exercising options, or a cross-border restructuring running alongside the ESOP pool — Rule 21 of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 permits the certifying valuer to be a Chartered Accountant, a SEBI-registered Merchant Banker, or a practising Cost Accountant (the “Category I” qualifier does not apply to this particular rule). This FEMA certificate is separate from the exercise-stage tax FMV discussed in Section 6, and the two should not be assumed to be the same document.
5. Legal Framework: Unlisted Companies and Listed Companies
The requirements differ depending on whether the company is unlisted or listed, and the differentiator is not company size but whether the company’s shares are traded on a stock exchange.
5.1 Unlisted companies: Companies Act, 2013
Section 62(1)(b) of the Companies Act, 2013 provides the statutory basis for issuing shares to employees under an employee stock option scheme. The detailed conditions sit in Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, covering shareholder approval by special resolution, the minimum one-year vesting period, and the principal terms the scheme must record: eligible employee classes, exercise price or pricing methodology, exercise period, and treatment of options on cessation of employment.
5.2 Listed companies: SEBI SBEB and Sweat Equity Regulations, 2021
Listed companies operate under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, which govern implementation, administration and disclosure of share-based employee benefit schemes, layered on top of the Companies Act requirements. The 2025 amendment discussed in Section 4.1 sits within this framework and is the most consequential recent change for a listed Rajasthan company’s ESOP compliance.
6. Who Values What: The ESOP Certification Matrix
An ESOP touches more than one valuation professional at more than one point in the lifecycle, and conflating them is a common and avoidable error.
| Requirement | Who certifies | Source |
|---|---|---|
| Fair value of the option at grant, for the accounting expense | Valuation professional using an option-pricing model such as Black-Scholes | Ind AS 102 |
| Underlying equity value at grant, unlisted company | Per the company’s scheme and board policy — typically the same valuer engaged for the option-pricing exercise | Section 62(1)(b) read with Rule 12 |
| Valuation of know-how/IP/value addition for a listed company’s sweat equity issuance | Registered Valuer, Section 247, Companies Act, 2013 (replaced Merchant Banker from 2 Jan 2026) — sweat equity only, not standard ESOS grants | Regulation 2(1)(ww) and 34(1), SEBI SBEB & SE (Second Amendment) Regulations, 2025 |
| Perquisite FMV at exercise, unlisted shares | Category I Merchant Banker registered with SEBI, on the exercise date or a date not more than 180 days earlier | Section 17(1)(d) read with Section 17(4)(h), Income-tax Act, 2025, and Rule 15(6), Income-tax Rules, 2026 |
| Perquisite FMV at exercise, listed shares | Average of the opening and closing exchange price on the exercise date — no separate certificate needed | Rule 15(6), Income-tax Rules, 2026 |
| FEMA pricing, where a non-resident employee or cross-border restructuring is involved | Chartered Accountant, SEBI-registered Merchant Banker, or practising Cost Accountant | Rule 21, FEMA (Non-Debt Instruments) Rules, 2019 |
| Tax deduction at source on the exercise-stage perquisite | Employer, as part of payroll | Section 392, Income-tax Act, 2025 |
| Capital gains on subsequent sale | Self-assessed by the employee, based on sale consideration less the FMV already taxed at exercise | Section 197, Income-tax Act, 2025 |
The two rows worth flagging: a Registered Valuer’s certificate and a Category I Merchant Banker’s certificate serve different provisions and are not interchangeable, and the Section 4.1 change only affects sweat equity valuation for listed companies — a narrower category than ESOS/ESOP grants generally. The exercise-stage perquisite FMV for an ordinary ESOP, listed or unlisted, is unaffected and continues under Rule 15(6).
Not sure whether your scheme needs a Registered Valuer, a Merchant Banker, a FEMA certificate, or more than one? Send your scheme structure and the trigger event — grant, exercise or a fundraising round — to CA Murli Chandak and you will get a written answer on which certificate applies and what it should contain. A consultation of up to 30 minutes is offered at no charge.
7. How ESOPs Are Taxed: The Two-Stage Framework, With Worked Examples
ESOP taxation falls at two distinct points, and an employee who understands only one of them will misjudge the actual net benefit.
7.1 At exercise: taxed as salary
The difference between the FMV of the shares on the exercise date and the exercise price actually paid is treated as a taxable perquisite under Section 17(1)(d) read with Section 17(4)(h) of the Income-tax Act, 2025, computed per Rule 15(6) of the Income-tax Rules, 2026. The employer deducts tax at source under Section 392.
Worked example: A Jaipur company grants an employee 1,500 options at an exercise price of ₹150 per share, vesting over four years. When the employee exercises the vested options, the Category I Merchant Banker determines the FMV at ₹450 per share.
Taxable perquisite = (₹450 − ₹150) × 1,500 shares = ₹4,50,000, taxed as salary in the year of exercise, with TDS deducted by the employer.
7.2 At sale: capital gains
When the shares are subsequently sold, any further appreciation (or decline) is taxed under the capital gains provisions of Section 197, Income-tax Act, 2025. For unlisted shares, a holding period of 24 months or more from the date of allotment qualifies as long-term, taxed at 12.5% without indexation; a shorter holding period is taxed as a short-term gain at the applicable slab rate.
Continuing the example: the employee later sells the 1,500 shares at ₹800 per share, having held them for over 24 months since allotment.
Capital gain = (₹800 − ₹450) × 1,500 shares = ₹5,25,000, taxed as long-term capital gains at 12.5% without indexation, since the ₹450 FMV was already taxed as salary perquisite at exercise and forms the cost base for this computation.
7.3 Startup deferral
Eligible startups recognised under Section 140, Income-tax Act, 2025 may allow employees to defer TDS on the exercise-stage perquisite. The deferral period is 60 months from the end of the relevant tax year for shares allotted on or after 1 April 2026, and 48 months for allotments before that date, under Section 392(3) read with Section 289(3). The deferral ends on the earliest of the deferral window expiring, cessation of employment, or sale of the shares.
8. ESOP Valuation: Equity Value Versus Option Value
A share and an option on that share are not the same thing, and the distinction matters for both accounting and tax.
The underlying equity value is the value of the company’s shares as a whole, arrived at through the usual approaches — income-based (discounted cash flow), market-based (comparable companies) or asset-based — depending on the company’s stage and the purpose of the valuation. For an unlisted Jaipur company, this almost always requires a professional valuation exercise — covered in more detail in our Company Valuation services — since there is no exchange price to observe.
The option value is a separate, smaller figure relevant primarily for the Ind AS 102 accounting charge. It depends on the exercise price, the current equity value, expected volatility, the option’s remaining life, expected dividends and the risk-free rate — the inputs to a Black-Scholes or similar option-pricing model. An option is worth less than the difference between current equity value and exercise price alone, because it also carries time value.
Companies should treat these as two separate valuation questions with two separate purposes, rather than assuming that one number from one exercise answers both.
9. Designing a Tax-Efficient, Employee-Friendly ESOP
A scheme that is technically compliant can still fail if employees do not understand it or if the company has not thought through dilution. Five design questions recur across CA Murli Chandak’s Jaipur engagements:
- Vesting schedule and cliff. A multi-year schedule, often with a one-year cliff before any options vest, supports retention without breaching the Rule 12 minimum.
- Exercise price. Set relative to the current equity valuation; too high and the scheme loses its retention value, too low and the resulting perquisite tax at exercise can surprise the employee.
- Liquidity and exit. For an unlisted company, a buy-back, secondary sale or acquisition event is the realistic exit route — this should be considered at design stage, not left implicit.
- Dilution and cap-table impact. Founders and existing investors should model the ESOP pool’s effect on fully diluted ownership before finalising the pool size, particularly ahead of a funding round.
- Employee communication. Employees should be able to answer, in plain terms: what am I receiving, when do I benefit, what will I pay, what tax applies, and what happens if I leave.
10. ESOPs for Jaipur Startups, MSMEs and Family-Owned Businesses
The right ESOP structure differs by stage and sector.
Startups — concentrated in and around Mahindra World City’s IT/ITeS zone and the wider city, in fintech, D2C and SaaS — generally use ESOPs to compete for talent while conserving cash, and need the scheme modelled against expected future fundraising rounds so the pool size and dilution are understood before a term sheet is signed. CA Murli Chandak’s Startup Solutions engagements often begin with exactly this modelling.
MSMEs — a large share of Jaipur’s gems and jewellery export base, hospitality operators and Sitapura/VKI manufacturing units — typically use ESOPs to retain a small number of critical managerial, design or export-compliance employees whose departure would be costly, often as a complement to, rather than a replacement for, existing salary structures.
Family-owned businesses, which make up a large part of Jaipur’s commercial base, may use ESOPs as part of leadership retention or a broader succession and professionalisation strategy, incentivising senior non-family executives without diluting family control beyond what the promoters intend.
None of these should be approached with a generic template. The pool size, eligibility and vesting structure that suits a five-year-old fintech startup rarely suits a two-generation-old jewellery export house, even though the underlying legal mechanics are the same.
11. What CA Murli Chandak’s ESOP Advisory Covers
CA Murli Chandak provides ESOP advisory and valuation-related services to Jaipur and Rajasthan businesses, covering scheme design, valuation, benefits assessment and documentation, coordinated with the company’s legal, tax and HR advisors; a fuller professional background is set out separately here.
11.1 Scheme design
Understanding the company’s retention or talent objective, then structuring pool size, eligibility, vesting and exercise terms consistent with Section 62(1)(b) and Rule 12, and with the company’s existing cap table.
11.2 Valuation
Equity valuation for the underlying shares, option valuation under Ind AS 102 where an accounting charge applies, and coordination with a Category I Merchant Banker for the exercise-stage perquisite FMV, or with the SEBI-mandated Registered Valuer process where a listed company is issuing sweat equity specifically.
11.3 Benefits assessment
Modelling the potential employee benefit against the proposed exercise price and vesting schedule, and the corresponding dilution and compensation-cost impact for the company, so both sides of the scheme are understood before implementation.
11.4 Documentation and implementation support
Coordinating the financial and valuation documentation — valuation workings, supporting assumptions, cap-table reconciliation — that sits alongside the scheme document and board and shareholder resolutions prepared by the company’s legal counsel.
12. Documents Required and How the Engagement Runs
| Group | Documents |
|---|---|
| Corporate | Incorporation documents, current shareholding pattern, capitalisation table including any existing ESOP pool and outstanding options, relevant board and shareholder resolutions |
| Financial | Audited financial statements (3 to 5 years), latest provisional financials where available, business plan and projections with underlying assumptions |
| ESOP-specific | Existing ESOP scheme or policy, if any; proposed grant details (number of options, exercise price, vesting schedule); employee eligibility information; prior valuation reports, if available |
| Step | What happens |
|---|---|
| 1 | Scoping call to establish the company’s objective, the eligible employee group, and whether this is a new scheme, an additional grant, or a review of an existing one |
| 2 | Engagement letter recording scope, valuation date, purpose, standard applied, deliverable and fees, none of which are contingent on the conclusion |
| 3 | A single consolidated information request, structured by the groups above |
| 4 | Scheme structuring and valuation analysis — equity valuation, option valuation where applicable, and benefits modelling |
| 5 | Draft discussed with management so factual errors are corrected; the conclusion itself is not negotiated |
| 6 | Final valuation and advisory documentation issued, coordinated with the company’s legal counsel for the scheme document and resolutions |
| 7 | Ongoing support through subsequent grants, exercises, valuation updates and fundraising rounds |
13. Common Mistakes to Avoid
- Treating the ESOP as an HR reward rather than a financial and legal exercise spanning corporate law, valuation, accounting and tax.
- Overlooking the Rule 12 minimum one-year vesting and the special-resolution approval it requires.
- Using an unsupported or outdated valuation — particularly a merchant banker valuation for a listed company’s sweat equity issuance after 2 January 2026, where a Registered Valuer is now required (standard ESOS grants are unaffected by this change).
- Confusing exercise price with FMV, leading to an unplanned tax liability for the employee at exercise.
- Conflating the exercise-stage tax FMV with a FEMA pricing certificate for export-facing companies with non-resident shareholders or employees — the two serve different provisions and are not the same document.
- Vague vesting or exit terms that create disputes when an employee resigns or is terminated.
- Ignoring future dilution before finalising the ESOP pool size ahead of a fundraising round.
- Inadequate documentation, which surfaces as a problem later — typically during due diligence, an audit or a tax assessment, not at grant.
14. Frequently Asked Questions
What does an ESOP consultant in Jaipur do?
An ESOP consultant helps a company design, value and implement an employee stock option scheme — covering scheme structure, equity and option valuation, benefits assessment, documentation and coordination with the company’s legal and tax advisors, across the grant, vesting, exercise and exit stages.
Why do Jaipur companies specifically need one?
Across CA Murli Chandak’s Rajasthan engagements, from gems and jewellery exporters to Mahindra World City technology units to early-stage startups, none of these sectors has a continuously observable share price. Determining a defensible FMV for both the accounting charge and the exercise-stage tax perquisite requires a structured valuation exercise, not an internal estimate.
Who can value ESOPs in India?
It depends on the purpose. The exercise-stage perquisite for an ESOP, listed or unlisted, is computed under Rule 15(6) — the exchange price for listed shares, or a Category I Merchant Banker’s valuation for unlisted shares. Separately, a listed company issuing sweat equity shares specifically (for know-how, IP or value addition, not a standard option grant) now requires an independent Registered Valuer under Section 247 for that valuation, following the 2 January 2026 SEBI amendment. The accounting-purpose option value under Ind AS 102 is a further, separate exercise, not tied to either certificate.
What is the minimum vesting period for ESOPs in India?
One year from the date of grant, under Rule 12(6)(a) of the Companies (Share Capital and Debentures) Rules, 2014. Companies may choose a longer schedule, but not a shorter one.
How are ESOPs taxed in India?
In two stages. At exercise, the difference between FMV and exercise price is taxed as a salary perquisite under Section 17(1)(d)/17(4)(h), with TDS under Section 392. At sale, any further gain or loss is taxed under the capital gains provisions of Section 197, with the exercise-date FMV forming the cost base.
Does an ESOP grant need Regional Director or NCLT approval in Jaipur?
No. An ESOP grant under Section 62(1)(b) is approved by the company’s shareholders through a special resolution, not by the Regional Director (North-Western Region) or the NCLT Jaipur Bench — those forums come into play for schemes of arrangement, capital reductions and similar transactions, not for a routine ESOP grant.
Do Jaipur’s gems and jewellery exporters need a separate certificate for non-resident employees?
Where an exercise or a related transaction involves a non-resident employee or a cross-border shareholding structure, a FEMA pricing certificate under Rule 21 of the FEMA (Non-Debt Instruments) Rules, 2019 may be needed in addition to — not instead of — the Rule 15(6) exercise-stage tax FMV. The two certificates answer different questions and are typically coordinated within the same engagement.
What changed for listed-company ESOP valuation in 2025-26?
The SEBI (Share Based Employee Benefits and Sweat Equity) (Second Amendment) Regulations, 2025, effective 2 January 2026, replaced the Merchant Banker requirement with an independent Registered Valuer for the valuation of know-how, IP rights or value addition underlying a listed company’s sweat equity issuance, with a nine-month transition for assignments already underway. It is narrower than the name suggests: it does not change how a standard ESOS grant is valued.
Can startups, MSMEs and family-owned Jaipur businesses all implement ESOPs?
Yes, subject to the same Section 62(1)(b)/Rule 12 framework. The appropriate pool size, eligibility and vesting structure differs considerably between the three — a startup typically prioritises broad-based talent retention against future fundraising dilution, an export-oriented MSME more often targets a small number of critical roles, and a family-owned business more often uses a smaller, targeted grant for senior non-family leadership.
How can CA Murli Chandak help with ESOP advisory in Jaipur?
Through scheme design, equity and option valuation, benefits assessment and supporting documentation, coordinated across the grant, exercise and exit stages, and with a direct line into the IBBI-Registered Valuer credential now required for listed-company sweat equity issuances.
15. Build an ESOP That Works for Your Business and Employees
An ESOP is a long-term ownership and retention instrument, not a documentation formality. Getting the valuation and tax mechanics right at grant and exercise avoids the two most common failure points — an unsupported FMV and an employee surprised by the exercise-stage tax bill.
If your business is considering a new ESOP, reviewing an existing scheme, or needs valuation support for a fundraising round, a consultation of up to 30 minutes is offered at no charge.
CA Murli Chandak – FCA | IBBI-Registered Valuer (Securities or Financial Assets) | IBBI/RV/07/2021/14408
Website: murlichandak.com
Phone: +91 99985 39902
Email: murlichandak@murlichandak.com
Statutory positions verified against source as at 11 August 2026. Regulatory requirements, field-office jurisdictions and tax provisions change; the position applicable to a particular scheme should be confirmed before implementation. This page is general information on Indian ESOP, valuation and tax requirements and is not advice on any specific transaction.
