ESOPs in the Indian economy, and the major drawbacks for companies

Twenty years ago, stock options in India were largely a perk for senior executives at IT majors and multinationals. Today they are part of the pay packet at startups, listed companies, banks and manufacturers. They have created a new kind of salaried wealth in India, and they have exposed the gaps in how Indian law, tax and capital markets handle employee ownership.

This post looks at both sides: what ESOPs are doing for the Indian economy, and why they remain hard for Indian companies to run well.

Part 1: ESOPs in the Indian economy

From executive perk to mainstream pay

The clearest sign of the shift is in listed companies' accounts. Listed Indian companies spent nearly ₹15,000 crore on employee stock option programmes in 2024-25, up about 30% on the previous year, according to CMIE data reported by Business Standard. Non-financial companies accounted for about ₹9,326 crore of that and financial firms about ₹5,573 crore. The list includes new-age companies such as Swiggy and Eternal (Zomato) alongside Mahindra & Mahindra, Wipro and HDFC Bank.

Startups and the rise of employee liquidity

In the startup world, ESOPs have become a central part of how companies compete for talent against larger, cash-rich employers. They matter because they let a young company offer a share of future value in place of salary it cannot yet afford.

What has changed in the last five years is that employees can increasingly turn that value into cash before an IPO:

• Indian startups have bought back close to $2 billion of employee stock since 2020, according to Entrackr.
• In 2025, 12 startups ran buybacks that let more than 9,200 employees realise about ₹1,409 crore, per Inc42.
• The first quarter of 2026 alone saw about $220 million of buybacks, led by BrowserStack.

IPOs as wealth events

Public listings have turned ESOPs into life-changing sums for some employees. Swiggy's 2024 listing was widely reported to have made around 500 employees crorepatis. Each tech IPO now produces a cohort of salaried people with meaningful equity, many of them outside founder and senior-leadership circles.

Why this matters for the economy

• Talent formation. ESOPs help startups hire experienced people away from stable jobs, which spreads skills across the ecosystem.
• Recycling capital. Employees who make money from ESOPs often become angel investors or founders themselves.
• Broader ownership. Equity ownership is moving beyond promoter families and institutional investors to employees.
• Alignment. When employees own part of the company, they share in its success and its risk.

Part 2: The major drawbacks for companies in India

ESOPs are not free, and in India several frictions make them harder to run than in, say, the US.

1. A real cost, even without cash

Under Indian accounting standards (Ind AS 102), the fair value of options granted is charged to the profit and loss account over the vesting period. That cost can be large. A company that looks profitable on an operating basis can report a loss once ESOP expenses are included, and analysts often debate "ESOP-adjusted" earnings for new-age listed companies.

2. Dilution of existing shareholders

Every option that becomes a share dilutes existing owners. Investors watch the size of the pool closely, and topping it up before a funding round usually comes out of founders' stakes. Companies must balance generous grants against keeping investors on side.

3. Taxing employees before they have cash

This is the biggest structural drawback, and it lands on companies as much as on employees. Tax is due at exercise on a gain that exists only on paper. For an unlisted company with no buyback planned, that means:

• Employees delay exercising, or let options lapse, so the incentive does not work as intended.
• The company still has a TDS obligation on the perquisite, even though it is paying no cash to the employee, and must collect the tax from salary or from the employee.

The startup deferral, which postpones this tax, applies only to DPIIT-recognised startups that also hold an inter-ministerial board certificate. As of October 2026, just 4,467 startups out of more than 2.5 lakh recognised startups held one. The deferral also ends the moment an employee resigns, so a job change can trigger a large tax bill on shares that still cannot be sold. Industry groups such as Nasscom asked Budget 2026 to extend the deferral to all recognised startups; it was not extended.

4. The cost and limits of providing liquidity

Because shares in unlisted companies cannot easily be sold, employees increasingly expect buybacks. Those cost real cash, often at a time when a startup would rather spend on growth. Company buybacks under the Companies Act also have limits on size and frequency, and have to be approved and filed. Startups that cannot fund buybacks find that their ESOPs carry less weight with candidates.

5. Valuation and compliance overhead

An unlisted company needs a registered valuer's report to set fair market value for tax, a board and shareholder-approved scheme under Section 62(1)(b) of the Companies Act and Rule 12 of the share capital rules, statutory registers, and annual disclosures. Listed companies must also follow SEBI's Share Based Employee Benefits Regulations. For smaller companies, this is a meaningful administrative and legal cost.

6. Who can and cannot receive options

Indian rules exclude promoters, the promoter group and directors holding more than 10% from ESOPs, except in DPIIT-recognised startups within ten years of incorporation. Independent directors are excluded entirely. Founders who become promoters at IPO previously faced uncertainty about earlier grants; SEBI's Regulation 9A, in force since September 2025, now protects options granted at least a year before the draft offer document. The rules are workable, but they constrain how companies can reward founders and board members.

7. Uncertainty over the company's tax deduction

Whether, and when, a company can deduct the cost of ESOPs in its own tax return has been the subject of litigation for years. Courts have largely allowed the deduction, but industry has continued to ask for it to be written into law. That uncertainty is one more reason some boards are cautious.

8. Low understanding among employees

Many employees do not understand their grants: the exercise price, the exercise window, the tax at exercise, or how dilution works. When ESOPs are misunderstood, they do not motivate or retain people, and the company bears the cost without the benefit. Unclear communication can also lead to disputes when people leave.

9. Underwater options and down rounds

When valuations fall, options can end up with an exercise price above the current value. Those options motivate no one. Repricing them is possible but costly and complex, and it can upset investors.

The bottom line

ESOPs have become an important channel through which India's growth reaches salaried workers, and they are central to how startups compete for talent. But for Indian companies they remain expensive to account for, complex to administer and, above all, hampered by a tax system that charges employees before they can sell. The companies that get the most from ESOPs are the ones that pair grants with clear communication, regular liquidity and help with tax at exercise.

That is the gap ESOP Record is built to fill: giving employees one clear view of what they hold, what it is worth at the latest valuation and what tax may be due, and giving companies a single, auditable record to share it from.

This article is general information, not tax, legal or investment advice. Figures are as reported by the sources below at the time of writing (November 2026).

Sources:

• Business Standard — ESOP payouts rose 30% to ₹15,000 crore in FY25
• Inc42 — ESOP buybacks in 2025
• Entrackr via Pulse — Q1 2026 buybacks and ~$2 billion since 2020
• Outlook Business — Swiggy's 2024 ESOP unlock
• StartupFeed — DPIIT recognised startups and 80-IAC certificates, October 2026
• India TV News — Nasscom's Budget 2026 ESOP ask
• Treelife — Union Budget 2026 synopsis
• Treelife — ESOP compliance under the Companies Act
• Bar & Bench — SEBI Regulation 9A