ESOP in private company, Corporate Laws / SEBI / LLP

[Nishtha Jain]

In case of issue of ESOPs in a private company, do we need to pass ordinary resolution or special resolution. Section 62(1)(b) was amended via notification G.S.R.464 (E) dated 5th June, 2015 and GSR 09(E) dated 04.01.2017 respectively, to exempt private companies from special resolution requirements. But rule 12 mandates SR. What needs to be done?

Posts / Replies

[YAGAY andSUN]

In the case of issuing ESOPs (Employee Stock Option Plans) in a private limited company, there's often confusion about whether an ordinary resolution (OR) or a special resolution (SR) is required.

Here’s the core issue:

• Section 62(1)(b) of the Companies Act, 2013 originally required a special resolution to be passed for issuing ESOPs.

• However, this was later amended through MCA notifications:

  • Notification G.S.R. 464(E) dated 5th June 2015 and

  • Notification G.S.R. 9(E) dated 4th January 2017,

  which exempted private companies from complying with certain provisions of the Act, including the requirement of passing a special resolution under Section 62(1)(b).

So, based purely on Section 62(1)(b) as modified for private companies, an ordinary resolution would be sufficient.

But here's where the conflict comes in:

The Companies (Share Capital and Debentures) Rules, 2014, specifically Rule 12(1)(c), still mandates that:

"The company shall obtain approval of shareholders by special resolution for issue of ESOPs..."

And these Rules have not been amended to reflect the exemption given in the notifications mentioned above.

So, what's the right approach?

Even though the section of the Act (as modified by notification) says special resolution is not required for private companies, the Rules still require it.

Under the hierarchy of law:

• Notifications under Section 462 override the provisions of the Act for specified classes of companies.

• But unless Rules are also amended to align with that, they technically still apply.

In practice, many professionals and companies take a cautious route and continue to pass a special resolution for issuing ESOPs in private companies, simply to avoid any non-compliance — especially because the Rules have not been amended.

Critical Analysis:

• Legally (based on the exemption notification): A private company can issue ESOPs by passing an ordinary resolution, because it is exempted from Section 62(1)(b)’s special resolution requirement.

• Practically and procedurally: Since Rule 12 of the Share Capital Rules still requires a special resolution, it is advisable to pass a special resolution until the Rules are amended or clarified by MCA.

• Best practice: Pass a special resolution to be fully compliant and avoid legal ambiguity.

***