Rule 12 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 12 applies to a company other than a listed company that is not required to follow the SEBI employee stock option guidelines. It may not offer shares to employees under an employees' stock option scheme unless the shareholders approve the scheme by special resolution and the other conditions are met: who counts as an employee, what the explanatory statement says, a minimum one-year vesting period, the limits on transfer, the Directors' Report disclosures and the SH-6 register.
This article is as amended up to G.S.R. 43(E) dated 21 January 2023 per the MCA e-book. Later amendments should be checked. For ESOP design and filings, see our ESOP and employee stock options service.
The scheme needs a special resolution. An "employee" is a permanent employee or a non-independent director, including those of a subsidiary or holding company, but not a promoter, a promoter group member or a person holding more than ten percent of the outstanding equity shares; a start-up company is exempt from those two exclusions for ten years from incorporation or registration. There must be a minimum one year between grant and vesting, options are not transferable, and the company keeps Form SH.6.
Rule 12(1): approval and the meaning of "employee"
A company, other than a listed company, which is not required to comply with the SEBI Employee Stock Option Scheme Guidelines, shall not offer shares to its employees under an employees' stock option scheme unless the issue of the scheme has been approved by the shareholders by a special resolution.
The Explanation, for clause (b) of section 62(1) and this rule, defines "Employee" as:
- (a) a permanent employee of the company who has been working in India or outside India; or
- (b) a director of the company, whole time or not, but excluding an independent director; or
- (c) an employee as in (a) or (b) of a subsidiary, in India or outside India, or of a holding company,
but does not include: (i) an employee who is a promoter or belongs to the promoter group; or (ii) a director who, himself or through a relative or any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.
The words "or of an associate company" were omitted by the Amendment Rules, 2015 of 18 March 2015.
The start-up proviso
A proviso inserted by the Third Amendment Rules, 2016 says that for a start-up company, as defined in notification G.S.R. 127(E) dated 19 February 2019 of the Department for Promotion of Industry and Internal Trade, the conditions in sub-clauses (i) and (ii) shall not apply up to ten years from the date of incorporation or registration. The notification reference and the "ten years" (earlier, five) were substituted by the Amendment Rules, 2019 of 16 August 2019. Our post on ESOP eligibility under rule 12: the promoter exclusion and start-up relief covers this in detail.
Rule 12(2) and (3): the explanatory statement and the exercise price
The explanatory statement annexed to the notice for the resolution discloses:
- (a) the total number of stock options to be granted;
- (b) the classes of employees entitled to participate;
- (c) the appraisal process for determining eligibility;
- (d) the requirements of vesting and the period of vesting;
- (e) the maximum period within which the options shall be vested;
- (f) the exercise price or the formula for arriving at it;
- (g) the exercise period and process of exercise;
- (h) the lock-in period, if any;
- (i) the maximum number of options per employee and in aggregate;
- (j) the method the company will use to value its options;
- (k) the conditions under which vested options may lapse, for example on termination of employment for misconduct;
- (l) the time within which the employee shall exercise vested options in the event of proposed termination or resignation; and
- (m) a statement that the company shall comply with the applicable accounting standards.
Under sub-rule (3), companies granting options have the freedom to determine the exercise price in conformity with the applicable accounting policies, if any.
Rule 12(4) and (5): separate resolutions and variation
| Sub-rule | Requirement |
|---|---|
| 12(4) | A separate shareholders' resolution is needed for (a) a grant of options to employees of a subsidiary or holding company, or (b) a grant to identified employees, in any one year, equal to or exceeding one percent of the issued capital (excluding outstanding warrants and conversions) at the time of grant |
| 12(5)(a) | The company may, by special resolution, vary the terms of a scheme not yet exercised, if the variation is not prejudicial to the option holders' interests |
| 12(5)(b) | The notice for that resolution discloses the full variation, the rationale and the details of the employees who benefit |
Rule 12(6) to (8): vesting, lock-in, forfeiture and transfer
- Minimum vesting (6)(a): a minimum period of one year between grant and vesting. If options are granted in lieu of options held in a scheme of another company that has merged or amalgamated with the first, the period during which the earlier options were held is adjusted against the minimum vesting period.
- Lock-in (6)(b): the company has the freedom to specify the lock-in period for shares issued on exercise.
- Shareholder rights (6)(c): employees have no right to dividend or vote or to enjoy the benefits of a shareholder in respect of options until shares are issued on exercise.
- Amount paid at grant (7): it may be forfeited if the option is not exercised within the exercise period, or refunded if options do not vest because vesting conditions are not met.
- Transfer (8)(a) and (b): options are not transferable to any other person and shall not be pledged, hypothecated, mortgaged or otherwise encumbered or alienated.
- Exercise (8)(c) to (f): only the employee may exercise, subject to: death in employment, when all options granted till then vest in the legal heirs or nominees; permanent incapacity in employment, when all options granted vest in him on that day; resignation or termination, when options not vested expire but vested options can be exercised within the period specified, subject to the scheme's terms as approved by the Board.
Rule 12(9) to (11): disclosure, register and listed companies
The Board discloses in the Directors' Report for the year: options granted, vested, exercised, lapsed and in force; shares arising from exercise; the exercise price; variation of terms; money realised; and employee-wise details for key managerial personnel, for any employee receiving five percent or more of the options granted that year, and for identified employees granted one percent or more of issued capital in a year.
The company maintains a Register of Employee Stock Options in Form No. SH.6, enters particulars forthwith of options granted under section 62(1)(b), keeps it at the registered office or another place the Board decides, and has entries authenticated by the company secretary or another person the Board authorises (sub-rule (10)). Where the equity shares are listed, the scheme is issued in accordance with SEBI regulations (sub-rule (11)).
Example: Pinnacle Robotics Private Limited, an unlisted company, passes a special resolution for a scheme. The explanatory statement includes the thirteen items. A director who, through a body corporate, holds more than ten percent of the equity shares is excluded under the ten percent test unless the start-up proviso applies to the company. Each grant has a minimum one-year vesting period. When an employee dies in service, all options granted vest in the legal heirs or nominees.
For the Act's text, see our section 62 guide. For sweat equity, see the article on rule 8.
Need help designing an ESOP?
An ESOP needs the right employee definition, resolutions and registers before the first grant. TaxClue can structure the scheme, prepare the notice and statement and keep the SH-6 register; see our ESOP and employee stock options page.
Key takeaways
- A special resolution approves the scheme; the explanatory statement has thirteen items.
- Employees include permanent employees and non-independent directors (and those of subsidiaries or the holding company), excluding promoters, the promoter group and holders of more than ten percent.
- Start-ups are exempt from those exclusions for ten years from incorporation or registration.
- A separate resolution is needed for subsidiary or holding company employees and for identified-employee grants of one percent or more of issued capital in a year.
- Minimum vesting is one year; options are non-transferable and cannot be pledged.
- The company keeps the SH.6 register and makes Directors' Report disclosures.
Read next
- Rule 8: sweat equity shares
- Rule 16: company money for employees' share purchases through a trust
- ESOP eligibility under rule 12: the promoter exclusion and start-up relief
- Section 62 of the Companies Act, 2013: further issue of shares
Disclaimer: Based on the Companies Act, 2013 rules named above as consolidated in the MCA e-book (consulted on 3 October 2026), with the later notifications the article names. Later amendments, fees, forms and the Companies Act, 2013 provisions referred to should be checked. This article is general information, not legal advice; check the official text before acting.