Written by: Mantasha Abid | Published: 17 September 2026 | 

The Core Question

Can an ESOP reduce exercise prices below face value? No. Under Indian law, face value is an absolute statutory floor.

Section 53: The Statutory Floor

Section 53 of the Companies Act, 2013 prohibits issuing shares at a discount. When employees exercise ESOP options, new shares are issued at the exercise price. If that price falls below face value, it violates Section 53. Face value is typically Rs 1, 5, or 10 per share.

Issue vs. Transfer Distinction

Issue of Shares: Prohibited below face value. When ESOP options are exercised, new shares are issued. Exercise price must be at or above face value.

Transfer of Shares: No restriction. If existing shares are transferred, no 'issue' occurs. Transfer price has no floor. This distinction is the legal hinge of ESOP pricing.

SEBI Regulatory Requirements

Regulation 12(1) of the SBEB Regulations requires exercise prices be determined by:
- Average closing price (30 or 90 trading days), or
- Opening price on grant date, or
- Face value, whichever is higher

Regulation 12(2): Repricing of pre-IPO options requires shareholder approval.

Three Practical Alternatives

1. Cashless Exercise: Employee exercises options at face value, then sells at market price. Proceeds cover exercise cost. Example: Exercise Rs 5 (face value Rs 1), market Rs 20. Employee nets Rs 15 gain with no cash outlay.

2. Share Subdivision with Repricing: Subdivide shares to lower face value, then proportionally adjust exercise prices. Example: 1,000 options at Rs 50 become 5,000 options at Rs 10. Requires shareholder approval.

3. Employee Benefit Trust: Trust acquires existing shares and transfers to employees at favorable prices. Example: Trust buys shares at Rs 8, transfers to employee at Rs 6. No new issuance issue.

Tax Implications

Perquisite Charge (Section 17(2)(vi)): When shares are acquired below fair market value, the difference is taxable as a perquisite. Company must deduct TDS.

Example: Fair Market Value Rs 100, exercise price Rs 1 = Rs 99 perquisite taxable to employee.

Common Misconceptions

- Face value doesn't apply to private companies: FALSE. It applies to all companies.
- Subdivision only for ESOP lowers the floor: FALSE. Must apply to all shares in the class.
- EBT can issue shares below face value: FALSE. EBT transfers existing shares, not issues new ones.
- Unregistered shares exempt from Section 53: FALSE. Registration status is irrelevant.

Repricing Requirements

Pre-IPO Schemes: Shareholder approval required for repricing.
Post-IPO Schemes: Shareholder approval required for any repricing.
Constraint: New exercise price cannot fall below face value.

Compliance Checklist

- Exercise price at or above face value
- Shareholder approval for repricing
- TDS calculated on perquisite value
- Alternative mechanisms properly documented
- Scheme includes regulatory disclaimers

Disclaimer

This article provides general information and is not legal advice. Before implementing any ESOP or repricing, engage qualified counsel for scheme documentation review, tax opinion on perquisite compliance, and shareholder approvals. Consult Insight Juris LLP for ESOP compliance guidance.

© Insight Juris LLP, 2026