ESOP Consultant in Bengaluru: Scheme Design, Valuation and Tax Compliance for Startups, GCCs and Pre-IPO Companies

In short: A Bengaluru company needs four things to align on an ESOP — a scheme that complies with Section 62(1)(b) of the Companies Act, 2013, a valuation from the correct professional for the specific purpose (a Registered Valuer and a Merchant Banker are not interchangeable, especially after the SEBI change that took effect on 2 January 2026), TDS handled correctly the moment an employee exercises, and — because so many Bengaluru companies sit under a foreign parent — FEMA and cross-border reporting sorted out wherever options are really shares of an overseas entity.

CA Murli Chandak is an IBBI-Registered Valuer for the asset class Securities or Financial Assets, registration number IBBI/RV/07/2021/14408, and has completed more than 300 valuation assignments across more than 7 countries, including the United States. Bengaluru’s ESOP demand comes from an employer base unlike any other Indian city: 55 unicorns headquartered here — more than any other city in India — more than 800 Global Capability Centres holding close to a third of the country’s GCC workforce, and a startup pipeline that reopens its cap table through fresh funding rounds faster than almost anywhere else in the country. For each of these groups, the practical questions rarely concern the concept of an ESOP. They concern which professional must now sign which certificate after the December 2025 SEBI change, how a foreign parent’s RSU or option grant should actually be treated, and what the perquisite tax actually costs an employee under the rules now in force.

1. Contents

1. Why Bengaluru companies are turning to ESOPs
2. What an ESOP is, in four stages
3. What changed for Bengaluru companies in 2026
4. The legal framework: unlisted and listed companies
5. Who values what: registered valuer, merchant banker or chartered accountant
6. ESOP taxation in India: the two-stage framework
7. Bengaluru’s foreign-parent and GCC structures
8. Building an ESOP scheme that works
9. Pre-IPO ESOP review and Regulation 9A
10. Documents needed to start
11. How a Bengaluru engagement runs
12. Common mistakes Bengaluru companies make with ESOPs
13. Experience behind Bengaluru engagements
14. Frequently asked questions

2. Why Bengaluru companies are turning to ESOPs

Bengaluru’s startup density changes what an ESOP has to do. A Koramangala or HSR Layout SaaS company competing for the same engineering and product talent as three other well-funded startups down the street cannot rely on cash compensation alone, and by most trackers’ estimates the city continues to draw close to 40 percent of India’s startup funding — so its ESOP pool will realistically be tested by a funding round or two well within its first three years.

The city is also India’s largest Global Capability Centre hub. A meaningful share of Bengaluru’s equity-compensation conversations therefore involve options or restricted stock in an overseas parent rather than a straightforward Indian-company ESOP — a structurally different problem from scheme design at an Indian-only company, addressed in Section 7. Add to this a steady pipeline of companies approaching an IPO and a workforce that moves between employers more readily than in most Indian cities, and ESOP planning in Bengaluru becomes a recurring exercise rather than a one-time document.

3. What an ESOP is, in four stages

An Employee Stock Option Plan gives an employee the right, not the obligation, to acquire company shares at a predetermined exercise price after satisfying vesting conditions. No ownership passes at grant — only the right to acquire shares later.

Stage	What happens
1. Grant	The company allots a specified number of options to an eligible employee under a grant letter that fixes the exercise price and the vesting schedule
2. Vesting	The employee becomes entitled to exercise once the vesting conditions are met, subject to the Rule 12(6)(a) one-year minimum
3. Exercise	The employee pays the exercise price for vested options and receives shares, triggering the first tax event and the first valuation requirement
4. Sale	The employee sells the shares, subject to the company’s policies and any lock-in, triggering the second tax event

ESOP planning that stops at the grant stage misses most of what actually determines whether the plan motivates employees or creates disputes later — leaver provisions, exercise windows and exit mechanics matter as much as the initial pool, and are addressed in Section 8.

4. What changed for Bengaluru companies in 2026

4.1 SEBI now requires an independent Registered Valuer, not a merchant banker, for listed-company ESOP and sweat equity schemes

Under the original SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, the valuer for a listed company’s ESOP or sweat equity scheme could be an independent chartered accountant or a merchant banker. The Second Amendment Regulations, 2025 (F. No. SEBI/LAD-NRO/GN/2025/284, notified 3 December 2025, effective 2 January 2026) replaced that position: Regulation 2(1)(ww) now defines “valuer” by reference to Section 247 of the Companies Act, 2013, and Regulation 34(1) now requires all fresh valuations under the Regulations to be carried out by an independent Registered Valuer. A merchant banker already engaged before the amendment could complete only the assignment already underway, within a nine-month transition window running from the 2 January 2026 effective date.

There is a second registration check worth making here, separate from the Category I Merchant Banker requirement itself: the SEBI (Merchant Bankers) (Amendment) Regulations, 2025 (F. No. SEBI/LAD-NRO/GN/2025/282, also effective 2 January 2026) confine fresh valuation engagements to Merchant Bankers who additionally hold SEBI registration for valuation-related activities specifically — Category I status on its own is no longer enough.

A separate change protects certain founders: Regulation 9A, addressed in Section 9, prevents pre-IPO ESOP grants from lapsing when the founder is later identified as a promoter in the DRHP, provided the grant was made at least one year before the IPO filing.

4.2 The Ministry of Corporate Affairs also gave Bengaluru its own Regional Directorate

Separately from the SEBI change, the Ministry of Corporate Affairs established a new Regional Directorate for the South-Western Region, headquartered at Bengaluru, with effect from 16 February 2026 (Notification S.O. 4852(E) dated 23 October 2025, as amended by S.O. 6115(E) dated 30 December 2025, which deferred the originally notified 1 January 2026 effective date). This Regional Directorate covers Karnataka, Kerala and the Union Territory of Lakshadweep.

Office	Jurisdiction from 16 February 2026
Regional Director, South-Western Region, Bengaluru (new)	Karnataka, Kerala and Lakshadweep
Registrar of Companies, Karnataka (Bengaluru)	Unchanged — not restructured, unlike Mumbai, Delhi and Kolkata’s ROCs
NCLT Bengaluru Bench	State of Karnataka

Source: Ministry of Corporate Affairs, Notification S.O. 4852(E) dated 23 October 2025, as amended by S.O. 6115(E) dated 30 December 2025, and PIB release dated 31 December 2025.

The practical consequence is that Bengaluru companies now have their Regional Directorate-level appeals under Section 454 of the Companies Act, 2013 heard locally rather than routed elsewhere, while the special resolution and MGT-14 filing an ESOP scheme approval requires still goes to the same Registrar of Companies, Karnataka as before. Field office jurisdictions are re-notified from time to time, so the correct office for a specific registered office should always be confirmed against the MCA’s own Registrar of Companies directory before a scheme resolution is filed.

5. The legal framework: unlisted and listed companies

5.1 Unlisted companies

Most Bengaluru ESOP schemes sit inside unlisted private limited companies. These schemes are governed by Section 62(1)(b) of the Companies Act, 2013 read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. Rule 12(6)(a) requires a minimum period of one year between the grant of an option and its vesting, and the scheme must be approved by shareholders through a special resolution, with the material terms disclosed in the explanatory statement. Companies must also maintain a Form SH-6 register recording every grant. The rule does not itself require a registered valuer’s report at the scheme-approval stage — that requirement arises later, and separately, for financial reporting and for the tax position at exercise.

5.2 Listed companies

A listed company’s ESOP, restricted stock unit, stock appreciation right or sweat equity scheme is governed by the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 — now requiring an independent Registered Valuer under Regulation 34(1), following the December 2025 amendment described in Section 4.1.

6. Who values what: registered valuer, merchant banker or chartered accountant

The most common ESOP mistake we see is treating one valuation certificate as good for every purpose. It is not. The table below sets out which professional applies to each ESOP-related requirement.

Requirement	Who values or signs	Statutory basis
Approval of the ESOP scheme, unlisted company	Special resolution of shareholders; no external valuer required at this stage	Section 62(1)(b) read with Rule 12, Companies (Share Capital and Debentures) Rules, 2014
Valuation for a listed company’s ESOP or sweat equity scheme	Independent Registered Valuer under Section 247, Companies Act, 2013	Regulation 34(1), SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, as amended w.e.f. 2 January 2026
Fair value of options at grant, for financial reporting	Valuation professional applying an option-pricing model such as Black-Scholes or binomial	Ind AS 102, Share-based Payment
Perquisite fair market value 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(5)(h), Income-tax Act, 2025, and Rule 15(6), Income-tax Rules, 2026
Perquisite fair market value at exercise, listed shares	Average of the opening and closing exchange price on the exercise date — no separate valuer required	Rule 15(6), Income-tax Rules, 2026
Tax deducted at source on the perquisite	Employer, at the time of exercise	Section 392, Income-tax Act, 2025

Where a Bengaluru company needs more than one certificate for the same transaction — a Companies Act/SEBI-scope Registered Valuer’s report alongside a Category I Merchant Banker’s tax certificate, for instance — the practical answer is to build both on one consistent set of financial assumptions, so the two documents do not tell a reviewer two different stories about the same company. For the fuller trigger list of when a Bangalore company needs a Registered Valuer’s report beyond ESOP schemes — funding rounds, related-party transfers, schemes of arrangement — see Registered Valuer in Bangalore.

7. ESOP taxation in India: the two-stage framework

ESOPs are taxed at two separate points, and the Income-tax Act, 2025, which took effect from 1 April 2026, renumbered the relevant provisions without changing the underlying framework.

7.1 Stage 1: perquisite tax at exercise

When an employee exercises vested options, the difference between the fair market value on the exercise date and the exercise price paid is treated as a taxable perquisite under the head Salary, under Section 17(1)(d) read with Section 17(5)(h) of the Income-tax Act, 2025, computed per Rule 15(6) of the Income-tax Rules, 2026. Tax is deducted at source by the employer under Section 392 of the Act.

Worked example. An employee at a Series B Bengaluru SaaS company exercises 2,000 vested options at an exercise price of Rs 50 per share, when the fair market value determined by the Category I Merchant Banker is Rs 350 per share.

Taxable perquisite = (Rs 350 − Rs 50) × 2,000 = Rs 6,00,000, added to the employee’s salary income for the year and taxed at the applicable slab rate, with TDS deducted by the employer at the time of exercise.

7.2 Stage 2: capital gains at sale

The fair market value used to compute the Stage 1 perquisite becomes the cost of acquisition for capital gains purposes, so the same value is not taxed twice. The holding period runs from the date of allotment on exercise, not the original grant date. For unlisted shares, a holding period exceeding 24 months qualifies as long-term, taxed under Section 197 of the Income-tax Act, 2025 — the general long-term capital gains provision, successor to Section 112 of the 1961 Act — currently at 12.5 percent without indexation.

Continuing the example: the employee sells the 2,000 shares 28 months after exercise at Rs 600 per share. Capital gain = (Rs 600 − Rs 350) × 2,000 = Rs 5,00,000, taxed as long-term capital gains at 12.5 percent, before cess.

7.3 Deferred taxation for eligible startups

DPIIT recognition on its own does not unlock deferral — this is the single most common misunderstanding we see. Employees of a startup can defer Stage 1 tax only if the company holds both DPIIT recognition and a separate Inter-Ministerial Board (IMB) certification under Section 140 of the Income-tax Act, 2025 (successor to Section 80-IAC of the 1961 Act). As of early 2026, only around 3,700 of India’s more than 1.97 lakh DPIIT-recognised startups hold that IMB certification — fewer than 2 percent — so most Bengaluru startups with DPIIT recognition alone cannot in fact offer their employees this deferral.

Where both conditions are met, Section 392(3) read with Section 289(3) of the 2025 Act (successor to Section 192(1C) of the 1961 Act) defers the liability until the earliest of:

1. 60 months from the end of the tax year in which the shares were allotted, for shares allotted on or after 1 April 2026 — extended from the 48-month window that applied to allotments before that date;
2. the date the employee ceases to be an employee of the company; or
3. the date the employee sells the shares.

This is a deferral of payment, not an exemption — the tax is computed at the slab rate applicable in the year of allotment, and the employer’s obligation to compute and report the liability is unaffected even though cash payment is postponed.

For unlisted-share tax valuations generally, companies should also track the validity of the FMV certificate itself — the commonly referenced 180-day window before exercise is a compliance checkpoint worth building into payroll and finance calendars.

8. Bengaluru’s foreign-parent and GCC structures

With more than 800 Global Capability Centres and close to a third of India’s GCC workforce based here, a significant share of Bengaluru’s equity-compensation questions do not involve an Indian ESOP at all — they involve Indian employees receiving stock options or restricted stock units of a US, European or Singapore-headquartered parent company. This is a structurally different exercise from a domestic ESOP, and treating it as one is a common and costly error.

Where an Indian-resident employee receives equity of an overseas entity, the questions that need answering include: which entity is actually granting the award; what FEMA route applies (this can raise Overseas Portfolio Investment or Liberalised Remittance Scheme considerations depending on the structure); what the FMV of the foreign shares is at the relevant date; what Indian tax and TDS obligations fall on the employer; and what foreign-asset reporting the employee personally owes, separate from the company’s own compliance. Schedule FA disclosure of foreign holdings runs on a calendar-year basis rather than the Indian financial year — a distinction that catches out employees who assume their tax filing and their foreign-asset filing follow the same calendar.

Because these arrangements sit across FEMA, cross-border taxation and the company’s own reporting simultaneously, they are rarely a single-professional job. Coordinated advice — valuation and financial analysis alongside the company’s tax and legal advisors — is the difference between a foreign-parent ESOP that runs cleanly and one that surfaces compliance gaps during a funding round or acquisition.

9. Building an ESOP scheme that works

A scheme that reads well on paper can still create unnecessary dilution or employee disputes if the underlying terms were not properly modelled. A few decisions carry disproportionate weight: pool size should be modelled forward against hiring and fundraising plans, not chosen as a round percentage; pre-money versus post-money pool creation has a real economic effect during a funding round, so founders should understand which side of the round a proposed top-up sits on before agreeing to it; vesting and cliff structure must meet the Rule 12(6)(a) one-year minimum but should otherwise reflect genuine retention goals rather than a copy-pasted template; good leaver, bad leaver and exercise-window provisions should be drafted before the first departure, not negotiated in the moment; and acceleration on acquisition or change of control should be a deliberate decision tied to investor agreements, not a default clause nobody revisited.

Bengaluru’s Regulation 9A protection for founders, discussed next, adds one more reason to review scheme design well before a listing rather than after.

One more rule deserves attention here: Regulation 9A of the SBEB Regulations addresses what happens when a founder holding ESOP grants is later identified as a promoter or promoter-group member in the DRHP. Ordinarily, promoters are not eligible to hold ESOPs, which would put those grants at risk of lapsing. Regulation 9A resolves this: where the founder’s options, SARs or other share-based benefits were granted at least one year before the IPO filing, the founder may continue to hold and exercise them on their original terms. The timing threshold is the part that catches people out — a grant made too close to the IPO filing date does not get the protection, which makes early review essential rather than a last-quarter task.

10. Documents needed to start

1. Constitutional. Certificate of incorporation, memorandum and articles of association.
2. Capital structure. Capitalisation table, shareholding pattern, and any existing ESOP pool or scheme document.
3. Financial. Audited financial statements for the last 3 years, and the latest management or provisional accounts.
4. Agreements. Existing shareholder or investor agreements that may restrict dilution or require consent.
5. Workforce. Proposed grantee list or eligibility criteria, and anticipated hiring plans driving the pool size.
6. Foreign-parent documents, where applicable. The parent company’s RSU or ESPP plan rules, so any India-specific advice is consistent with them.
7. Forward-looking. Board-approved business projections supporting the valuation.

11. How a Bengaluru engagement runs

Step	What happens
1	Consultation to establish whether the company is listed or unlisted, and therefore which professionals and which certificates the scheme requires
2	Engagement letter setting out purpose, valuation date, standard applied and scope
3	Information request for the documents in Section 10, issued in tranches so drafting can begin early
4	Pool sizing and vesting structure discussion with founders or the board
5	Valuation build — grant-date fair value, and coordination with a Category I Merchant Banker or, for a listed scheme, the Registered Valuer work directly
6	Draft scheme documents and valuation shared for verification of facts
7	Board and shareholder approval support, followed by signed reports and ongoing administration support

Working with a Bengaluru client from an Ahmedabad-based practice changes nothing about the quality of the file, and every step above runs through document-based workflows and video consultations scheduled around Bengaluru business hours.

12. Common mistakes Bengaluru companies make with ESOPs

1. Using one valuation for every purpose. A Companies Act valuation, an Ind AS 102 accounting fair value and an Income-tax exercise-date FMV are three different exercises, not one report reused three times.
2. Treating a foreign-parent RSU or option grant like a domestic ESOP. The FEMA, cross-border tax and reporting obligations are genuinely different.
3. Assuming DPIIT recognition alone unlocks TDS deferral. It does not — a separate Inter-Ministerial Board certification under Section 140 is also required, and fewer than 2 percent of DPIIT-recognised startups hold it.
4. Ignoring the 2026 valuer shift. Continuing to default to a Merchant Banker for Companies Act/SEBI-scope valuations after the 2 January 2026 change risks a defective certificate.
5. Sizing the ESOP pool without modelling forward. A pool set without reference to the next two to three years of hiring and funding rarely survives contact with a real Series A.
6. Granting to ineligible persons. Promoters and certain directors face restrictions; eligibility should be checked before the grant, not after.
7. Incomplete documentation. A missing board or shareholder approval, or an out-of-date SH-6 register, becomes a real problem during fundraising due diligence or a pre-IPO review.
8. Waiting until the IPO process has started to review the scheme. By then, fixing legacy grants or missed Regulation 9A timing is far harder than catching it a year earlier.

13. Experience behind Bengaluru engagements

This track record maps directly onto Bengaluru’s own ESOP demand: the registration category the 2026 SEBI shift now calls for, the cross-border experience its GCCs and foreign-parent structures need, and the transaction-adjacent valuation work its pre-IPO pipeline draws on.

14. Frequently asked questions

Does an ESOP consultant have to be based in Bengaluru to advise a Bengaluru company?

No. IBBI Registered Valuer registration under Section 247 applies nationwide, and the bulk of an ESOP engagement — document review, valuation work, scheme drafting, video meetings — happens through digital workflows no matter where the advisor sits.

Who values a Bengaluru startup’s ESOP now — a Registered Valuer or a Merchant Banker?

It depends on the purpose. Companies Act and SEBI-scope valuations now require an IBBI Registered Valuer, following the amendment effective 2 January 2026. Income-tax exercise-date FMV for unlisted shares still names a Category I Merchant Banker under Rule 15(6). The two are not the same engagement.

What was the 2026 SEBI change and why does it matter for Bengaluru?

The SEBI (Share Based Employee Benefits and Sweat Equity) (Second Amendment) Regulations, 2025 redefined “valuer” by reference to Section 247 of the Companies Act, 2013, shifting fresh Companies Act/SEBI-scope ESOP valuations from Merchant Bankers to Registered Valuers, with a nine-month transition for assignments already underway. It matters in Bengaluru specifically because of the sheer volume of listed and soon-to-list companies with active ESOP programmes here.

How is the ESOP perquisite tax calculated?

Fair market value on the exercise date, minus the exercise price actually paid, times the number of shares exercised — the result is taxed as salary income under Section 17(1)(d) of the Income-tax Act, 2025.

How is ESOP taxed when the shares are sold?

The exercise-stage FMV becomes the cost of acquisition; the sale proceeds less that cost is taxed as a capital gain, long-term or short-term depending on the holding period and whether the shares are listed or unlisted.

Can a Bengaluru startup defer ESOP TDS?

Only if it holds both DPIIT recognition and a separate Inter-Ministerial Board certification under Section 140 — DPIIT recognition on its own is not enough. Where both apply, the deferral runs until sale, cessation of employment, or the expiry of the prescribed period, whichever comes first.

Can employees of an Indian GCC or subsidiary hold options in a foreign parent company?

Yes, and this is common in Bengaluru. It requires separate consideration of FEMA and overseas investment rules, cross-border taxation and foreign-asset reporting — it is not treated the same as a domestic ESOP.

Do founders lose their ESOPs if they become classified as promoters before an IPO?

Not automatically. Regulation 9A protects options, SARs or other benefits granted at least one year before the DRHP filing, allowing the founder to continue holding and exercising them on the original terms.

Which Registrar of Companies and NCLT bench does a Bengaluru company fall under now?

Karnataka companies continue to file with the Registrar of Companies, Karnataka, unchanged by the February 2026 realignment. Regional Directorate-level appeals now go to the new Regional Directorate (South-Western Region) headquartered in Bengaluru, covering Karnataka, Kerala and Lakshadweep. The NCLT Bengaluru Bench covers the State of Karnataka.

When should a Bengaluru startup create its ESOP pool?

Ideally while structuring the company’s initial cap table and hiring plan, sized against a realistic two-to-three-year hiring and fundraising forecast rather than a round percentage chosen without modelling.

15. Speak to an ESOP consultant

If you are designing a new ESOP pool, valuing an existing scheme, reconciling a foreign parent’s equity plan with India’s requirements, or preparing for a pre-IPO review, a short conversation with CA Murli Chandak at the outset usually saves considerable rework later. Consultations of up to 30 minutes are 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 on 18 August 2026. Field office jurisdictions, SEBI regulations and Income-tax provisions change from time to time; the position applicable to a specific company should be confirmed before filing. This page is general information on ESOP scheme design, valuation and tax compliance in India and is not advice on any specific transaction. Where a matter requires a legal opinion, specialist legal advice should be taken.