Company Law for Startups (Part 4): Share Capital, Allotment and ESOPs
How startups issue shares and ESOPs: authorised capital, preferential allotment, valuation, PAS-3 in 15 days, Rule 12, vesting, tax and common mistakes.
A Gachibowli startup agrees to give its first engineer “0.5% equity” over a handshake. Eighteen months later, nobody can find a board resolution, a grant letter or a valuation. When the investor asks for the cap table, the founders realise promises are not shares.
1. Four capital terms in plain words
| Term | Meaning |
|---|---|
| Authorised capital | The maximum capital the company can issue under its MOA |
| Issued capital | The portion actually offered and allotted |
| Subscribed capital | The portion investors have agreed to take |
| Paid-up capital | The amount actually received; this decides small-company eligibility (limit Rs 10 crore from 1 December 2025) |
2. Ways to issue shares
| Route | Use when | Key requirements |
|---|---|---|
| Rights issue (Section 62(1)(a)) | Offering to existing shareholders first | Offer letter, 15 to 30 days to accept (confirm), then allotment |
| Preferential allotment / private placement (Sections 62(1)(c), 42) | Fundraising from investors | Special resolution (MGT-14 within 30 days), registered valuer report, PAS-4 offer, money through bank, PAS-3 within 15 days |
| ESOP (Section 62(1)(b)) | Rewarding employees | Special resolution, scheme under Rule 12, grant, vesting, exercise |
| Sweat equity (Section 54) | Founder or key talent for know-how or IP | Special resolution and valuation (confirm conditions) |
| Bonus shares (Section 63) | Capitalising reserves | Authorised by articles, resolution, no default in repayments |
3. Allotment, step by step
ComplianceKart drafts the resolutions, valuation coordination, PAS-3 and registers, and aligns them with your shareholders agreement. See our startup compliance page.
4. ESOPs: the essentials
| Topic | Position |
|---|---|
| Who can receive | Permanent employees and directors (other than independent directors); promoters and promoter-group are generally excluded |
| Startup relief (DPIIT-recognised) | For a period of ten years from incorporation, the promoter / 10% holder exclusion and the minimum vesting period do not apply (confirm the period and current Rule 12 text) |
| Vesting | At least one year between grant and vesting (for non-startups) |
| Approval | Special resolution; explanatory statement; scheme details |
| Tax | Perquisite taxed on exercise, capital gains on sale; eligible startups may get deferral of perquisite tax (confirm under the Income-tax Act, 2025) |
| Foreign employees | Reported under FEMA, often with FC-GPR on allotment (see FEMA Part 2) |
5. Share transfers and dematerialisation
- Transfers between shareholders use Form SH-4 with stamp duty (0.015% on physical share transfer; confirm) and board approval as per the articles.
- Private companies other than small companies were required to issue securities in dematerialised form and dematerialise existing holdings (confirm current deadline and exemptions under the Prospectus and Allotment Rules).
6. Common mistakes
- Promising equity without a resolution, grant letter or vesting schedule.
- Allotting before receiving money in the company bank account.
- Skipping the valuation report on preferential allotment.
- Filing PAS-3 late or not at all.
- Increasing authorised capital after allotment.
- Keeping a spreadsheet cap table that differs from the statutory register.
Why work with ComplianceKart
ComplianceKart is a boutique practice bringing Chartered Accountants, Company Secretaries and advocates under one roof. Think of a multi-speciality hospital: the physician, the radiologist and the pharmacist read from one patient file, so you never carry reports between buildings. A funding round is a legal, tax and valuation exercise at once. When these specialists work from one file, resolutions, filings and the shareholders agreement stay consistent.
Frequently Asked Questions
What is PAS-3?
A return of allotment filed with the Registrar within 15 days of allotting shares.
Is valuation needed for private placement?
Generally a registered valuer’s report is needed for preferential allotment and private placement (confirm exceptions).
Can promoters get ESOPs?
Generally not, but DPIIT-recognised startups enjoy a relaxation for a period of ten years from incorporation (confirm Rule 12 text).
What is the minimum vesting period?
One year between grant and vesting for non-startups; relaxed for eligible startups.
Are ESOPs taxed?
Yes, at exercise as a perquisite and at sale as capital gains; deferral may be available for eligible startups. Check current provisions.
Sources
- Companies Act, 2013: Sections 42, 54, 62, 63
- Companies (Share Capital and Debentures) Rules, 2014: Rules 8, 12, 13
- Companies (Specification of Definition Details) Amendment Rules, 2025 (G.S.R. 880(E))
Ready to act? Start with our startup compliance page, check pricing, or contact us.
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Educational article, last updated 11 November 2026. General information, not advice on a specific case. Laws and due dates change; confirm on the date you act. Items marked (confirm) came from secondary sources and need checking against the official text.
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