ESOP Valuation Services in India

An ESOP needs up to three different valuations: the fair market value of the share when options are granted, the fair value of the option itself for the accounts, and the fair market value of the share on the date of exercise for the employee's perquisite tax. We prepare the first two as an IBBI Registered Valuer. The third, for an unlisted company, must by law be determined by a SEBI category I merchant banker, so our role there is preparation, reconciliation and the tax computation, not the signature.

Three Numbers in the Life of an ESOP

Founders often ask for "an ESOP valuation" as if it were one report. It is not, and treating it as one is how companies end up with an exercise price that looks arbitrary, an option expense their auditor will not sign off, or a perquisite computed on a number the law does not recognise. The three values answer three different questions and are governed by three different rules.

Where an option holder is resident outside India, the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 also apply to the issue of shares on exercise.

Grant-Date Fair Value for the Accounts

Every company that grants options has to recognise an employee benefit expense for them. Companies reporting under Ind AS apply Ind AS 102, Share-based Payment, which measures equity-settled options at their fair value on the grant date and spreads that cost over the vesting period. Companies that follow the Accounting Standards notified under the Companies (Accounting Standards) Rules rather than Ind AS look to the ICAI's Guidance Note on Accounting for Share-based Payments (Revised 2020). Where the fair value approach is applied under either framework, the valuation is the same exercise: an option-pricing model on top of a share valuation.

The grant-date value is fixed once and is not revisited when the share price later moves, so the inputs have to be right on the day. A board that approves a grant in March and a valuation dated in September is a common audit query; we date the valuation to the grant date in the board minutes.

Black-Scholes inputs and where each comes from

Each vesting tranche is valued separately because each has its own expected term. Where vesting depends on a market condition, such as an exit at a minimum valuation, a binomial or Monte Carlo model replaces Black-Scholes, and the condition is built into the fair value rather than into the vesting estimate. The report sets out every input, its source and a sensitivity table, so the auditor can trace the expense in the notes back to the model.

The Share Valuation Behind the Exercise Price

Under section 62(1)(b) of the Companies Act, 2013 an ESOP needs a special resolution of the shareholders, and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 sets the minimum disclosures, the one-year minimum vesting period and the categories of eligible employees. For an unlisted company the rule leaves the exercise price to the company, in conformity with the applicable accounting policies. There is no Companies Act requirement for a registered valuer's report at each grant. Most boards still want one: an exercise price set at a documented fair value is easier to explain to investors, avoids an unexpectedly large option expense, and gives employees a defensible reference point for the value of what they have been offered.

We value the equity on the grant date using DCF and market evidence, as described on our business valuation page, and reconcile it to the last funding round. Where the scheme is being adopted or amended, we review the pricing clause and the explanatory statement before they go to shareholders. A listed company's scheme is governed by the SEBI share-based employee benefits regulations instead, and is outside the scope of this page.

FMV on Exercise for Perquisite Tax: Who Can Sign

When an employee exercises options, the difference between the fair market value of the shares on the date of exercise and the exercise price is a perquisite taxed as salary under section 17(1)(d) of the Income-tax Act, 2025, and the employer deducts tax at source on it. How that fair market value is determined is prescribed by Rule 15 of the Income-tax Rules, 2026, which carries forward the old Rule 3(8) of the 1962 Rules:

• For a share listed on a recognised stock exchange, the value is taken from the exchange price on the date of exercise, using the average of the opening and closing price.
• For a share not listed on a recognised stock exchange, it is the value determined by a merchant banker on the specified date, and the rule defines a merchant banker as a category I merchant banker registered with SEBI.
• The specified date is the date of exercise or any date earlier than it, but not more than 180 days earlier. One merchant banker valuation can therefore cover exercises over a six-month window.

An IBBI registered valuer's report, a chartered accountant's certificate or the Rule 57 net-asset formula does not satisfy this rule. We say that plainly because it is a common misunderstanding, and a perquisite computed on the wrong report leaves the company exposed to a short-deduction default and the employee to a reassessment. What we do at exercise:

• prepare the information pack the merchant banker needs, including the latest projections and the grant-date valuation, so their work starts from a reconciled base;
• plan the valuation date so that it covers the expected exercise window within the 180-day limit;
• compute the perquisite per employee and the TDS through payroll, and record the fair market value as each employee's cost of acquisition for capital gains when they later sell.

The merchant banker is engaged by the company and bills separately. We work with merchant bankers the company chooses, or can suggest firms we have worked alongside.

Tax Deferral for Eligible Start-ups

An employee of an eligible start-up does not have to pay the tax on the perquisite in the year of exercise. The deferral, introduced by the Finance Act, 2020 and carried into the Income-tax Act, 2025, applies where the employer is a start-up recognised by DPIIT and also holds the Inter-Ministerial Board certificate for the start-up profit-linked deduction. DPIIT recognition on its own is not enough. Tax on the perquisite is then payable, and deducted by the employer, within 14 days of the earliest of three events:

1. the expiry of 60 months from the end of the relevant tax year (section 289(3) of the Income-tax Act, 2025; the 1961 Act allowed 48 months from the end of the assessment year);
2. the date the employee sells the shares;
3. the date the employee ceases to be employed by the company.

The 60-month window applies to tax years from 2026-27 onwards; allotments taxed under the 1961 Act keep their 48-month end date. The deferral changes when the tax is paid, not how much: the perquisite is still computed on the merchant banker's fair market value on the date of exercise, and the rate is that of the year of allotment. If you are not sure whether your company qualifies, our guide to DPIIT start-up recognition explains the first step.

Documents We Need

• The ESOP scheme as approved by shareholders, and any amendments
• Board resolutions and grant letters for the grants being valued, with grant dates, numbers, exercise prices and vesting schedules
• A fully diluted cap table, including CCPS, convertible notes and the unallocated pool
• Audited financial statements for the last two years and recent management accounts
• Projections for three to five years, and the term sheet and share price of the most recent funding round
• For the accounts: the accounting framework (Ind AS or Accounting Standards), the reporting date and the auditor's contact
• For exercise: the list of employees exercising, exercise dates and payroll details for TDS

Timeline

A grant-date fair value report usually takes 5 to 10 working days from receipt of complete data, including the share valuation underneath it: a draft for you and your auditor, then the signed report. Where the share valuation already exists from a recent round, the option valuation alone is quicker. For year-end reporting, start four weeks before the audit fieldwork; for exercise windows, book the merchant banker early enough that the specified date falls within 180 days of the expected exercises.

ESOP Valuation Fees

Indicative professional fees for typical engagements, excluding GST, government/ROC fees, stamp duty and any merchant banker's fee. The final fee depends on the number of grants, tranches and share classes, and is confirmed in writing before work starts. Fees are subject to change without notice.

A detailed breakdown of what drives the fee and how long each step takes is in ESOP Valuation Cost and Timeline in India.

Example Engagement: First Grant Cycle at a Series A Company

Illustrative example: a composite of typical engagements, not a specific client. Names and figures are representative.

Situation. A Mumbai consumer-technology company that follows the Accounting Standards (not Ind AS) had adopted an ESOP scheme with a pool of 8% of the fully diluted capital and made its first grants to 22 employees, with four-year graded vesting. Its auditor asked for a grant-date fair value before signing the accounts. The company had closed a Series A eight months earlier at ₹1,200 per CCPS.

What we did. We valued the ordinary shares on the grant date by reconciling a DCF to the Series A price after adjusting for the CCPS liquidation preference, which put the ordinary share at about ₹950. The exercise price in the grant letters was ₹100. We valued each of the four vesting tranches separately with Black-Scholes, using volatility from a set of listed consumer-internet peers, expected terms between 3 and 6 years and Government securities yields of matching maturity, and produced an expense schedule by tranche and by year.

Timeline. Complete data on day four; draft with the auditor on day eleven; signed report on day thirteen after two queries on the volatility peer set.

Outcome. The option expense for the year was booked and disclosed with the inputs in the notes. The company was also told, in writing, that the first exercises would need a SEBI category I merchant banker valuation under Rule 15, and that it qualified for the start-up deferral only if it obtained the Inter-Ministerial Board certificate in addition to its DPIIT recognition.

Frequently Asked Questions