Aligning Talent and Regulation: Pre IPO Equity Strategy Under India’s 2026 Companies Act Reforms
In fast growing, IPO bound Indian companies, equity linked compensation has always sat at the intersection of talent strategy and regulation. On paper, there is a growing toolkit of instruments—ESOPs, RSUs, ESARs, phantom stock and hybrids. In practice, however, Indian company law and IPO regulations have historically pushed most unlisted companies into a single dominant construct: the Employee Stock Option Plan (ESOP) under Section 62(1)(b) of the Companies Act, 2013. This ESOP centricity has created a structural gap between what the Companies Act recognises and what SEBI’s ICDR framework attempts to regulate at the time of listing, particularly when it comes to Stock Appreciation Rights (SARs). The Corporate Laws (Amendment) Bill, 2026 is the first attempt to bridge that gap, with potentially important implications for how Companies design long term incentives over the next few years.
From a reward design standpoint, ESOPs and ESARs are more similar than they are different. Both are long‑term incentive vehicles meant to align employees with value creation over time. Both usually have a minimum vesting period, need approval from the NRC, the Board and shareholders, and trigger broadly similar taxation patterns for employees: perquisite tax at exercise and capital gains tax on sale of resulting shares. Both also require the company to recognise accounting cost at grant, amortised over the vesting period. In commercial terms, employees participate in the upside of the share value under both structures.
The real difference lies in mechanics and outcomes. Under a traditional ESOP, an employee receives options that typically convert into shares on a 1:1 basis at exercise, against payment of an exercise price. The entire share value (less the exercise price) effectively accrues the employee. Under an equity settled SAR (aka ESAR), the employee receives a right only to the appreciation over a base price, usually settled in shares. The appreciation is delivered, via a smaller number of shares determined at exercise. This can meaningfully reduce dilution for existing shareholders and lower immediate cash outflow upon exercise, but it also compresses the long term upside for employees compared with a like for like ESOP, because ESAR holders end up with fewer resultant shares.
These structural differences matter even more once you overlay the regulatory and listing perspective. Under the Companies Act and related rules, ESOPs are clearly recognised and widely understood. Boards, investors and advisers treat them as the standard pre‑IPO equity currency. As a company moves towards its IPO, ESOPs granted pre-IPO can be carried forward post‑listing under SEBI’s ICDR framework.
ESARs, however, have historically occupied a much trickier space. For years, the Companies Act recognised only ESOPs under Section 62(1)(b). Instruments such as RSUs, ESARs and structured phantom stock had no clear statutory home—they were either forced into ESOP‑style terminology or left in purely contractual frameworks. SEBI’s ICDR framework reflected this reality. When an unlisted company tried to go public with an ESAR‑type structure, regulators had limited flexibility to treat ESARs like ESOPs because the Companies Act did not acknowledge them as a recognised class of share‑linked scheme. In one widely cited case, an issuer’s initial IPO filing based on an ESAR construct drew regulatory pushback for not fitting the then‑existing ICDR framework; the company ultimately had to re‑file with an ESOP structure before SEBI approved the IPO.
SEBI took a step forward in 2025 by amending the ICDR Regulations to expressly recognise ESARs in the IPO context. However, even after this recognition, a key practical asymmetry remained. ESOPs have a specific carve‑out under ICDR that allows them to continue beyond listing and be exercised post‑IPO. ESARs, by contrast, are expected to be exercised before the filing of the red herring prospectus or prospectus. In effect, ESARs must crystallise before the securities reach the public markets, while ESOPs can straddle the listing event. For HR and reward leaders, this timing gap is not a technical footnote; it fundamentally changes how attractive ESARs can be as a core pre‑IPO vehicle.
Sitting underneath all of this has been a simple but powerful constraint: the Companies Act itself has, until now, formally recognised only ESOPs as a share‑linked instrument under Section 62(1)(b). Everything else—RSUs, ESARs, phantom stock—has existed in a grey zone of practice. SEBI could not, in effect, give ESARs a full ESOP‑style exemption in ICDR if the primary Companies Act did not acknowledge ESARs (or other value‑linked instruments) in the first place. For HR and reward leaders, this has meant operating with a split reality: a global market where RSUs and ESARs are standard and often preferred at senior levels, and a domestic legal framework that pushes you back to options when you want regulatory clarity, especially in the run‑up to an IPO.
The Corporate Laws (Amendment) Bill, 2026 is expected to close exactly this gap, the Bill proposes to expand Section 62(1)(b) to cover issuances under “schemes linked to the value of share capital,” moving decisively beyond the narrow ESOP construct. It is intended to provide formal statutory recognition to RSUs, ESARs and other value‑linked awards, while aligning the Companies Act more closely with SEBI’s share‑based employee benefit regulations that already apply to listed companies. For HR and reward functions, this is the missing legal foundation: once the Act recognises these instruments explicitly, it becomes much easier for securities regulations like ICDR to extend ESOP‑style treatment and exemptions to them over time.
At the same time, it is critical to recognise that the legislative journey is not yet complete. The Corporate Laws (Amendment) Bill, 2026 has been referred to a Joint Parliamentary Committee. Only when both the primary law and the detailed rules are aligned will companies have a truly clear and administrable regime for RSUs, ESARs and other value‑linked awards. In parallel, one would reasonably expect SEBI to revisit ICDR and the SEBI employee benefit regulations to ensure that ESARs and other newly recognised instruments can, over time, access similar exemptions and transitional provisions as ESOPs currently enjoy, particularly around IPO timing and post‑listing continuity.
For HR and reward leaders, the key question is what to do in this transitional phase. In the short term, ESOPs will remain the most robust foundation for pre‑IPO equity plans, especially where you need a line of sight across the listing event and into the early years of life as a listed company. They are legally well understood, investors are familiar with their economics, and the regulatory path from unlisted ESOP to listed employee stock option scheme is tried and tested. If you are contemplating ESARs or RSUs today, it is important to recognise that until the Companies Act amendments are notified and the rules are updated, these instruments will still need to be implemented within an ESOP‑style legal environment, supported by careful documentation and close coordination between HR, legal and finance.
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