Introduction and Background

The Corporate Laws (Amendment) Bill, 2026 (Bill No. 85 of 2026), introduced by the Ministry of Corporate Affairs (MCA), proposes a range of changes to the Limited Liability Partnership Act, 2008 and the Companies Act, 2013. These proposed amendments are aimed at modernising corporate regulation and bringing it in line with evolving business practices.

One of the key proposed changes relates to Section 62(1)(b), which deals with the issuance of shares to employees under Employee Stock Option Plans (ESOPs). The proposed amendment seeks to insert the words “or under such other scheme linked to the value of the share capital of the company” after the phrase “under a scheme of employees’ stock option.”

While this may appear to be a minor textual modification, it carries significant interpretational and practical implications. In particular, it is intended to expand the scope of the ESOP framework to include newer forms of share-based compensation, while continuing to treat ESOPs as the core concept.

Existing Legal Framework of ESOPs

Under the current provisions of Section 62(1)(b), a company intending to increase its subscribed share capital can issue additional shares to its employees through an ESOP scheme. Such issuance requires approval of shareholders by way of a special resolution and must comply with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.

Traditionally, ESOPs are understood as instruments that give employees the right or option to subscribe to shares of the company at a predetermined price at a future date. The framework is centred on actual equity issuance and is supported by detailed procedural requirements.

However, this framework is relatively narrow, as it recognises only conventional ESOP structures and does not sufficiently accommodate other forms of share-based compensation that are increasingly used in modern corporate practice.

Proposed Amendment and Structural Change

The proposed amendment widens the scope of Section 62(1)(b) by introducing the phrase “such other scheme linked to the value of the share capital of the company.” This change reflects a clear shift beyond a purely ESOP-driven regime and acknowledges a broader range of equity-linked compensation structures.

It brings instruments such as stock appreciation rights (SARs) and restricted stock units (RSUs), along with ESOPs, within the statutory framework governing employee equity participation. Importantly, the proposed amendment preserves ESOPs as the central concept while extending the regulatory umbrella to cover schemes that are economically similar in nature.

Conceptual Shift: From Instrument to Framework

The proposed amendment marks a transition from a form-based approach to one grounded in economic substance. The focus shifts from the legal structure of the instrument to whether the benefit is linked to the value of the company’s share capital.

A pertinent question that arises in this context is whether phantom stock (i.e., cash-settled SARs) would fall within the ambit of the amended provision. The amendment uses the expression “linked to the value of the share capital,” and phantom stock, though cash-settled, is undeniably linked to such value, with the appreciation being paid out in monetary terms rather than through actual allotment of shares.

However, it is equally important to read this expansion in light of the heading of Section 62 itself—“Further Issue of Share Capital.” This indicates that the provision continues to fundamentally govern issuance of equity instruments, and therefore, schemes culminating in actual allotment of shares would fall squarely within its scope.

In this context, it may be noted that phantom stock (i.e., cash-settled SARs), despite being linked to the value of share capital, would stand excluded from the scope of Section 62(1)(b), as such instruments do not involve actual issuance of shares.

Interplay with SEBI (SBEB & SE) Regulations, 2021

The proposed amendment also invites a comparative reading with the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, which recognise multiple categories of employee benefit schemes, including:

• Employee Stock Option Schemes (ESOPs)
• Employee Stock Purchase Schemes (ESPS)
• Stock Appreciation Rights Schemes (SARs)
• General Employee Benefits Schemes (GEBS)
• Retirement Benefit Schemes (RBS)

By virtue of the insertion of “such other scheme linked to the value of the share capital of the company,” it appears that equity-settled SARs, RSUs, and ESOPs would fall within the expanded scope of Section 62(1)(b), as they culminate in or are directly tied to equity issuance.

However, a nuanced issue arises in the context of Employee Stock Purchase Schemes (ESPS). While ESPS are recognised under SEBI (SBEB & SE) Regulations, their alignment with the Companies Act, 2013 framework remains uncertain. The governing provision under Companies Act, 2013—Rule 12 of the Share Capital and Debentures Rules, 2014—mandates, inter alia, a minimum one-year vesting period, whereas ESPS under SEBI (SBEB & SE) Regulations do not require such vesting.

Accordingly, in the present framework, ESPS will not seamlessly fall within Section 62(1)(b). If legislative intent is to align company law with SEBI (SBEB & SE) Regulations, separate enabling rules would be required, rather than attempting to extend Rule 12 beyond its current scope.

Coverage of GEBS and RBS under 62(1)(b)

A further question arises with respect to General Employee Benefits Schemes (GEBS) and Retirement Benefit Schemes (RBS) under SEBI (SBEB & SE) Regulations.

These schemes are typically structured through trusts that acquire shares—often via secondary market purchases—and utilise the economic benefits for employee welfare purposes such as healthcare, insurance, retirement, or other social security benefits.

• No direct share issuance to employees – the benefit is economic, not proprietary.
• Secondary acquisition model – shares are acquired from the existing shareholders rather than issued by the company.

In light of these characteristics, such schemes do not align with the fundamental premise of Section 62(1)(b), which is concerned with the further issuance of share capital. Since GEBS and RBS do not result in the direct issuance of shares to employees and are primarily designed to provide welfare benefits, they fall outside the scope of this provision.

Further, if the legislative intent is to align the Companies Act, 2013 with the broader framework under SBEB regulations, a separate provision dealing specifically with share-based employee benefits may be required. The present structure of Section 62, being confined to the concept of further issue of share capital, does not adequately accommodate schemes that operate beyond actual equity issuance.

Critical Analysis: Merits of the Proposed Amendment

The proposed amendment appears to be largely progressive and effectively addresses several long-standing gaps in the legal framework. One of its key strengths is that it aligns statutory provisions with prevailing market practices, where companies increasingly adopt innovative and flexible compensation structures linked to equity value. By widening the scope of Section 62(1)(b), the proposed amendment removes the artificial distinction between ESOPs and other share-based schemes. This, in turn, reduces the need to structure such arrangements under preferential allotment provisions—which often involve detailed valuation norms and pricing requirements—while still ensuring appropriate shareholder oversight through the requirement of a special resolution. As a result, it promotes greater regulatory coherence and simplifies compliance, enabling companies to function within a more unified framework for employee equity participation.

Further, the proposed amendment reinforces the ESOP regime by shifting it towards a principle-based approach rather than treating it as a rigid instrument, thereby improving its adaptability and relevance in an evolving corporate landscape.

Structural Limitation of Section 62 and Need for Legislative Reframing

Additionally, the divergence between the Companies Act and SEBI (SBEB & SE) Regulations highlights a deeper structural limitation within the current framework. SEBI (SBEB & SE) Regulations operate with a clear recognition of market trading and secondary acquisition, whereas the Companies Act is primarily oriented towards issuance of securities and capital formation, without incorporating a trading-based perspective.

More fundamentally, from Interpretation of Statues standpoint, the scope of a provision cannot exceed the limits of its heading. Section 62 is explicitly confined to “further issue of share capital,” and therefore, any attempt to extend its ambit to schemes that do not involve actual issuance of shares would be inconsistent with its legislative structure.

In this context, if the legislative intent is to align company law with the broader framework under SEBI (SBEB & SE) Regulations, such alignment cannot be achieved through expansion of Section 62 alone. It would instead necessitate the introduction of a separate statutory provision, along with dedicated rules, governing share-based employee benefit schemes in their entirety.

Trust Route and Secondary Acquisition Gap

Moreover, the Companies Act, 2013 does not recognise secondary acquisition of shares through trusts in employee benefit schemes. While SEBI (SBEB & SE) Regulations permit trusts to acquire shares from the market, Section 62(1)(b) read with Rule 12 is limited to fresh issuance, and Section 67 read with Rule 18 only regulates financial assistance to trusts, without providing a framework for their operation. This creates a structural gap, indicating the need for a dedicated provision under the Companies Act.

Practical Impact on the ESOP Regime

The practical impact of this proposed amendment is significant and largely positive. For companies, it offers greater flexibility in structuring employee compensation, allowing them to design incentive mechanisms that align with long-term value creation without being restricted to conventional ESOP formats. For employees, it broadens the scope of participation in the company’s growth by providing access to a wider range of equity-linked benefits.

From a governance perspective, the requirement of shareholder approval is expected to assume greater importance, as equity-based instruments—that derives its value from the company’s shares would require such approval. This, in turn, strengthens transparency and accountability within the overall framework.

Extension of the Amendment to Other Provisions of the Companies Act

The amendment to Section 62(1)(b) is not an isolated change but reflects a broader legislative intent to recognise all schemes linked to the value of share capital across the Companies Act, 2013. Corresponding amendments have been proposed in Sections 42 and 68, ensuring consistency in the treatment of equity-linked employee compensation.

In Section 42(2), the exclusion from the private placement limit is proposed to be extended beyond ESOPs to include other share-linked schemes such as Restricted Stock Units (RSUs) and equity-settled Stock Appreciation Rights (SARs). This allows companies to issue such instruments without being constrained by the numerical cap on identified persons.

Similarly, amendments to Section 68 expand the scope of buy-back provisions to cover securities issued under such schemes. This includes enabling buy-back of instruments like RSUs and SARs, extending the exception to the six-month restriction on fresh issuance post buy-back, and broadening the definition of “specified securities” to expressly include such instruments.

Taken together, these amendments reinforce a unified and principle-based framework, ensuring that all employee compensation mechanisms linked to share value are treated consistently within the statutory regime.

Conclusion

In conclusion, the proposed amendment to Section 62(1)(b) represents a considered evolution of the ESOP regime, reflecting the changing nature of employee compensation in the corporate sector. By extending its scope to cover schemes linked to the value of share capital, the legislature has effectively moved from a narrow, instrument-specific approach to a more flexible, principle-based framework.

While the reform is clearly progressive and aligned with global practices, its effectiveness would be further enhanced by making suitable changes to Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. Ultimately, the proposed amendment does not change the core nature of ESOPs; instead, it repositions them within the broader landscape of share-based compensation, establishing them as the central pillar for employee ownership and value sharing in modern corporate governance.