SEBI's June 2025 ESOP Amendment: Extended Post-Termination Exercise Periods

Executive Summary

SEBI's June 2025 amendment to the Share Based Employee Benefits Regulations fundamentally changes how listed companies can structure ESOP exercise periods for departing employees. The amendment permits exercise periods up to 5 years post-termination (previously typically 3-6 months), providing employees meaningful time to accumulate funds for exercise. This article analyzes the amendment's scope, implementation requirements, and strategic implications for both companies and employees.

Key Changes:

• Maximum post-termination exercise period extended to 5 years
• Companies can differentiate exercise periods by termination type
• Enhanced disclosure requirements in annual reports
• Retrospective application permitted with board approval
• Tax implications remain unchanged

Introduction

ESOPs are meant to align employee interests with company success. But when an employee leaves - whether voluntarily or due to layoffs - the typical 30-90 day exercise window often means forfeiting vested options simply because they can't afford the exercise cost on short notice.

SEBI's June 2025 amendment addresses this fundamental fairness issue while giving companies flexibility to structure programs that reflect their specific circumstances and employee relations philosophies.

Section 1: Pre-Amendment Framework

SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021

Previous Structure:

Industry Problems

Employee Perspective:

• Vested options forfeited due to inability to exercise quickly
• Forced to exercise during career transition (financial stress)
• No time to arrange funds for exercise
• Tax liability at exercise without liquidity

Company Perspective:

• Talented employees reluctant to leave even when it's time
• Litigation over forfeiture clauses
• Negative reputation among prospective hires
• Complexity in tracking former employee options

Comparison with Global Practices

Section 2: The June 2025 Amendment

Amended Regulation 18 (Exercise Period)

New Provision:

"Notwithstanding anything contained in these regulations, the Nomination and Remuneration Committee may, with the approval of the Board of Directors, extend the exercise period for vested options to a maximum period of five years from the date of cessation of employment, subject to such conditions as the Committee may specify."

Key Elements

1. Five-Year Maximum:

• Longest permissible exercise window
• Applies from date of employment cessation
• Company can set shorter periods (their choice)

2. Board Approval Required:

• NRC recommends
• Board approves
• Shareholder approval not required (existing scheme suffices)

3. Differential Treatment Permitted:

Companies Can Differentiate By:

Termination Type:
├─ Voluntary resignation → 2 years
├─ Mutual separation → 3 years
├─ Layoff/redundancy → 5 years
├─ Termination for cause → Immediate forfeiture
├─ Retirement → 5 years
└─ Death/disability → 5 years (to nominee/estate)

Tenure:
├─ <2 years service → 6 months
├─ 2-5 years service → 2 years
└─ >5 years service → 5 years

Level:
├─ Junior employees → 1 year
├─ Mid-level → 3 years
└─ Senior/Key → 5 years

4. Conditions Permissible:

• Non-compete compliance
• Confidentiality obligations
• No competing business involvement
• Return of company property
• Cooperation in transition

Disclosure Requirements

Annual Report Disclosures:

Effective Date

• Amendment Notification: June 15, 2025
• Applicability: All new grants from July 1, 2025
• Retrospective Application: Permitted with Board approval for existing vested options

Section 3: Implementation Framework

For Companies Adopting Extended Periods

Step 1: Policy Development

ESOP Exercise Period Policy Template:

1. PHILOSOPHY
   [Company] believes vested options represent earned compensation.
   Extended exercise periods allow departing employees to realize
   this value without financial duress.

2. EXERCISE PERIODS BY TERMINATION TYPE

   | Termination Type | Exercise Period | Rationale |
   |------------------|-----------------|-----------|
   | Voluntary (good leaver) | 3 years | Standard accommodation |
   | Voluntary (regretted attrition) | 5 years | Retention of goodwill |
   | Mutual separation | 5 years | Fair treatment |
   | Layoff/retrenchment | 5 years | Compassionate approach |
   | Termination for cause | 0 (forfeiture) | Breach of trust |
   | Retirement | 5 years | Long service recognition |
   | Death/disability | 5 years | Family protection |

3. ADDITIONAL CONDITIONS
   - Non-compete compliance during exercise period
   - Annual confirmation of continued eligibility
   - Immediate exercise right terminates on competing employment

4. APPROVAL AUTHORITY
   - CEO approval for standard cases
   - NRC approval for exceptions
   - Board ratification annually

Step 2: Scheme Amendment

Board Resolution Format:

RESOLVED THAT pursuant to the SEBI (Share Based Employee Benefits
and Sweat Equity) Regulations, 2021, as amended in June 2025, the
Board hereby approves the following amendments to the [Company Name]
Employee Stock Option Scheme 2020:

1. Regulation [X] (Exercise Period) shall be substituted with:
   "The exercise period for vested options shall be determined as
   per the Exercise Period Policy approved by the NRC and Board
   from time to time, subject to a maximum of five years from
   the date of cessation of employment."

2. The Exercise Period Policy attached as Annexure A is hereby
   approved.

3. The Company Secretary is authorized to file necessary
   disclosures with stock exchanges.

FURTHER RESOLVED THAT the extended exercise periods shall apply:
(a) To all grants made on or after July 1, 2025
(b) Retrospectively to vested options held by employees who have
    ceased employment on or after January 1, 2025 [Optional]

Step 3: System Updates

Step 4: Communication

Employee Communication Template:

Subject: Enhanced ESOP Exercise Period Policy

Dear [Employee],

We are pleased to announce an enhancement to our ESOP program
following SEBI's June 2025 regulatory changes.

KEY CHANGES:
• Extended exercise periods for vested options if you leave
• Up to [X] years to exercise after departure (previously 90 days)
• Different periods based on circumstances of departure

WHAT THIS MEANS FOR YOU:
• If you leave [Company], you'll have more time to exercise
• Less financial pressure during career transitions
• Your vested options represent real, accessible value

DETAILED POLICY:
[Link to Exercise Period Policy]

Questions? Contact [HR/ESOP Admin]

Best regards,
[CHRO/CEO]

Section 4: Strategic Considerations

For Companies

Competitive Advantage:

Cost-Benefit Analysis:

Benefits:
+ Improved employer brand
+ Reduced attrition (options have real value)
+ Easier separation negotiations
+ Reduced litigation risk
+ Alumni goodwill (referrals, boomerangs)

Costs:
- Administrative complexity
- Dilution uncertainty (longer exercise periods)
- Share price exposure to former employees
- Tracking burden for departed employees
- Potential overhang concerns

Accounting Impact:

• Expense recognition unchanged (at grant)
• Modification accounting if retrospective application
• Forfeiture rate assumptions may need revision
• Enhanced disclosure requirements

For Employees

Negotiation Points:

Exercise Strategy:

Extended Period Exercise Planning:

Year 1 Post-Departure:
├─ Assess financial situation
├─ Monitor stock price
├─ Understand tax implications
└─ Plan exercise timing

Year 2-3:
├─ Exercise in tranches (tax optimization)
├─ Consider 83(i)(1) deferral if available
├─ Coordinate with other income
└─ Maintain eligibility conditions

Year 4-5:
├─ Complete exercise before expiry
├─ Consider early exercise if price favorable
└─ Ensure compliance with conditions

Section 5: Tax Implications

Income Tax Treatment (Unchanged)

At Exercise (Section 17(2)(vi)):

• Taxable perquisite = FMV at exercise - Exercise price
• Taxed as salary income (even if former employee)
• TDS obligation on company

At Sale:

• Capital gains from exercise price equivalent to FMV at exercise
• STCG (15%) if held <12 months from exercise
• LTCG (10% above ₹1 lakh) if held >12 months

Extended Period Tax Planning

Challenge:

• Longer exercise period = more years to plan
• Tax rates may change over 5 years
• Opportunity for optimization

Strategies:

For Companies: TDS on Former Employees

Practical Challenge:

• Former employee exercises 3 years after leaving
• Company must deduct TDS on perquisite value
• No salary to deduct from

Solutions:

• Require payment of TDS equivalent before share issuance
• Withhold shares equivalent to TDS value (if scheme permits)
• Net settlement arrangement (fewer shares issued)

Section 6: Special Situations

Mergers and Acquisitions

Acquirer Perspective:

• Extended exercise periods = longer option overhang
• Former employee options may complicate cap table
• Due diligence must capture departed employee options

Target Perspective:

• Acceleration clauses may still apply
• Extended period survives M&A (typically)
• Integration planning must address former employee options

Change in Control

Typical Provisions:

• Acceleration on change in control
• Extended period resets from change date (potentially)
• Acquiring company assumes option obligations

Insolvency/Winding Up

Employee Rights:

• Options may become worthless if company fails
• Extended period doesn't protect against value destruction
• Exercise rights may be affected by insolvency proceedings

Delisting

Post-Delisting Exercise:

• Exercise period continues
• Share valuation per SEBI delisting regulations
• Exit opportunity for option holders

Section 7: Comparison: Listed vs. Unlisted Companies

Listed Companies (SEBI Regulated)

Unlisted Companies (Companies Act Governed)

Practical Impact:

• Many unlisted companies already offer longer periods
• Amendment levels playing field for listed companies
• Market practice will align across listed/unlisted

Section 8: Implementation Checklist

For Listed Companies

Implementation Checklist:

PRE-JULY 2025:
□ Review current ESOP scheme provisions
□ Analyze employee demographics for impact assessment
□ Benchmark against peer companies
□ Develop Exercise Period Policy
□ Obtain NRC recommendation
□ Obtain Board approval
□ Update scheme documents
□ File stock exchange disclosures

JULY 2025 ONWARDS:
□ Update ESOP administration systems
□ Communicate policy to employees
□ Train HR team on new classifications
□ Update offer letters for new grants
□ Modify termination checklists
□ Create tracking mechanism for former employees

ONGOING:
□ Annual report disclosure preparation
□ Regular policy review
□ Track former employee exercises
□ Update forfeiture estimates for accounting
□ Maintain eligibility compliance monitoring

For Employees

Employee Action Items:

IF CURRENTLY EMPLOYED:
□ Review updated ESOP policy
□ Understand your exercise period if you leave
□ Factor extended period into career decisions
□ Maintain compliance with conditions

IF PLANNING TO LEAVE:
□ Confirm termination classification with HR
□ Get written confirmation of exercise period
□ Understand conditions for extended period
□ Plan exercise strategy

IF ALREADY DEPARTED:
□ Check if company offers retrospective extension
□ Request extension if not automatic
□ Maintain eligibility conditions
□ Plan exercise before expiry

Section 9: Recommendations

For Companies

1. Adopt Generous Periods: Market will move toward maximum; don't lag
2. Differentiate Thoughtfully: Termination type matters; be fair
3. Communicate Clearly: Employees should understand value
4. Apply Retrospectively: Goodwill with recent departures
5. Integrate with Exit Process: Make exercise period part of separation discussion

For Employees

1. Understand Your Rights: Know your exercise period before leaving
2. Negotiate if Possible: Request longer period or better classification
3. Plan Exercise Strategy: Use extended time wisely
4. Maintain Eligibility: Comply with conditions to preserve rights
5. Monitor Expiry: Don't let options lapse

For Advisors

1. Update Templates: Standard schemes need amendment
2. Advise on Policy: Help clients develop differentiated policies
3. Tax Planning: Long-term exercise strategies
4. M&A Considerations: Option overhang in valuations
5. Disclosure Compliance: New annual report requirements

Conclusion

SEBI's June 2025 ESOP amendment represents a meaningful shift toward employee-friendly equity compensation. Key takeaways:

The amendment recognizes that vested options are earned compensation - not just retention handcuffs. Companies that embrace this philosophy will attract and retain better talent; those that don't will find their equity compensation less competitive.

For employees, the message is clear: understand your rights, negotiate where possible, and plan your exercise strategy to maximize value over the extended period.

Sources

• SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021
• SEBI Circular CIR/CFD/POLICY CELL/6/2025 (June 2025 Amendment)
• Section 17(2)(vi) Income Tax Act, 1961
• ESOP Taxation in India - EY Analysis
• NASSCOM ESOP Best Practices Guide