When SBI Funds Management Ltd — India’s largest asset manager — listed on the stock exchanges in July 2026, its IPO didn’t just create wealth for public shareholders. It quietly turned at least 13 employees into crorepatis, with the top beneficiary sitting on ESOP-linked shares worth over ₹121 crore. None of them were founders. None of them were promoters. They were fund managers, compliance officers and HR heads who had been granted stock options over the years. This is exactly what a well-designed ESOP is supposed to do.
Introduction: The ₹100-Crore Payslip Nobody Saw Coming
In July 2026, business headlines were dominated by a single, eye-catching number: at least 13 employees of SBI Funds Management Limited (SBIFML) — the asset management joint venture between the State Bank of India and France’s Amundi — found themselves sitting on shareholdings worth more than ₹1 crore each once the company listed on the BSE and NSE. Devinder Pal Singh, the company’s Deputy Managing Director and one of its longest-serving employees, held vested shares worth roughly ₹121 crore, with another ₹30 crore in unvested options still to come. Chief Investment Officer Srinivasan Rama Iyer wasn’t far behind, with vested holdings worth close to ₹105 crore and unvested options worth another ₹51 crore. Other senior professionals — the Chief Compliance Officer, the Chief Financial Officer, fund managers, and even the Chief Human Resources Officer — all found their names on the crorepati list.
None of this wealth came from a lottery, a bonus, or a golden parachute. It came from something far more structured and far more replicable: an Employee Stock Option Plan, or ESOP, that SBIFML had been running since 2018, granting options to employees at exercise prices as low as ₹39 and as high as ₹455 a share. When the IPO priced the stock at ₹574 — and the market pushed it higher still on listing day — years of patient, unglamorous option grants turned into life-changing money.
For business owners, HR leaders, CFOs and employees alike, the SBI Funds story is a near-perfect case study in why ESOPs exist, how they work, and why every growing company — not just venture-funded start-ups — should understand them. This guide uses that story as its spine while covering everything you need to know about ESOPs in India.
1. What Exactly Is an ESOP?
An Employee Stock Option Plan (ESOP) is a scheme under which a company grants its employees and directors the right — but not the obligation — to purchase a specified number of the company’s own shares, at a price fixed in advance (called the exercise price or strike price), at some point in the future, provided certain conditions are met.
Strip away the legal language and the idea is simple: instead of paying an employee only in salary, the company also hands them a coupon that says, “You can buy our shares later at today’s price, whatever they’re worth then.” If the company grows and its share price rises, that coupon becomes valuable. If it doesn’t, the coupon is simply never exercised, and the employee has lost nothing beyond the opportunity.
The core idea: deferred, contingent ownership
An ESOP is not a gift of shares. It is a right to acquire shares later, and that right only matures if the employee stays with the company for an agreed period (vesting) and, in most schemes, chooses to pay the exercise price to convert the option into an actual share (exercise). This is what makes ESOPs fundamentally different from a cash bonus — the value is uncertain, backloaded, and directly tied to the company’s performance and the employee’s continued presence.
2. Key ESOP Terms Everyone Should Know
Before going further, it helps to fix the vocabulary. ESOP conversations get confusing fast because the same word can mean different things in casual use versus statute. Here is the vocabulary that matters:
Term | What it means |
Grant | The company’s formal offer of a certain number of options to an employee, recorded in a grant letter. |
Grant date | The date on which the option is granted — the clock for vesting starts here. |
Vesting | The process by which an employee earns the right to exercise options, usually by staying employed over time or hitting performance milestones. |
Vesting schedule | The timetable of vesting — e.g., 25% each year over 4 years, or a 1-year cliff followed by monthly vesting. |
Cliff | A minimum waiting period (commonly 1 year) before any options vest at all, even if the overall schedule is longer. |
Exercise | The act of actually paying the exercise price to convert vested options into real, allotted shares. |
Exercise price / Strike price | The pre-agreed price the employee pays per share on exercise, usually set at or near the fair market value on the grant date. |
Fair Market Value (FMV) | The value of a share as determined by law at a given date — market price for listed companies, or a merchant banker/chartered accountant’s valuation for unlisted ones. |
Exercise period | The window of time (after vesting) within which the employee must exercise the option before it lapses. |
ESOP pool | The percentage of a company’s total equity set aside and reserved for present and future option grants. |
Liquidity event | The moment — an IPO, acquisition, or secondary sale — at which employees can actually convert their shares into cash. |
3. The Life Cycle of an ESOP, Step by Step
Every ESOP, from a five-person start-up to a listed giant like SBI Funds Management, moves through the same five stages:
- Grant — The company’s board (and, for larger grants, its shareholders) approves an ESOP scheme and grants a specific employee a number of options at a fixed exercise price, recorded in a written grant letter.
- Vesting — Over an agreed vesting period (commonly 3–5 years), the employee progressively earns the right to exercise the options, subject to continued employment. Leave before the cliff, and the unvested options are typically forfeited.
- Exercise — Once vested, the employee can choose to pay the exercise price and convert options into actual equity shares. This is optional; an employee is never forced to exercise.
- Holding — The employee now holds real shares (not options) and is a shareholder like any other, on the register of members, entitled to whatever rights ordinary shareholders enjoy under the scheme.
- Liquidity / Sale — The employee eventually sells the shares — on the stock exchange if the company is listed, or through a buyback, secondary sale, or acquisition if it is not — and realises actual cash.
This is precisely the arc that played out at SBI Funds Management. Options granted from 2018 onward, at prices between ₹39 and ₹455, vested over the years that followed. Employees who stayed, exercised, and held on found themselves holding real shares by the time of the July 2026 IPO — at which point Stage 5, liquidity, finally arrived, at an issue price of ₹574 and a listing-day pop above ₹610.
4. Why Companies Issue ESOPs: The Benefits to the Business
It is tempting to think of ESOPs purely as an employee benefit. In reality, they are primarily a corporate finance and talent-strategy tool, and the benefits to the issuing company are just as important as the benefits to the employee.
a. Retention without cash burn
ESOPs let a company reward and retain high-performing employees without an immediate cash outflow. This matters enormously for cash-constrained start-ups, but it is equally valuable for a mature, profitable company like SBI Funds Management, which used ESOPs over nearly a decade to retain the very executives — a Deputy Managing Director, a Chief Investment Officer, a Chief Compliance Officer — whose institutional knowledge is hardest to replace.
b. Aligning incentives with shareholders
Because option value rises and falls with the company’s own share price, ESOPs give employees a direct, financial stake in the outcomes that matter to owners: profitability, prudent risk-taking, and long-term growth rather than short-term optics. A fund manager who is also a shareholder has every reason to protect the firm’s reputation and performance.
c. A powerful recruitment lever
In competitive talent markets — financial services, technology, pharmaceuticals — a credible ESOP scheme lets a company compete for talent against rivals that may offer higher headline salaries but no ownership stake at all.
d. Signalling confidence and building an ownership culture
Granting options signals that management believes in the company’s future value, which can be a powerful internal morale booster and an external signal to prospective hires and investors alike.
e. Smoothing succession and rewarding loyalty
Long-vesting ESOP schemes reward the employees who stay through difficult periods — exactly the profile of the SBI Funds Management leaders who had been with the organisation since the mid-2000s and 2010s and were still there when the IPO finally arrived, years after the scheme was first introduced in 2018.
5. Why Employees Value ESOPs
- Wealth creation tied to genuine business growth, not just salary increments.
- A sense of ownership and psychological investment in the company’s success.
- Potential for outsized, life-changing gains at a liquidity event such as an IPO or acquisition — as the SBI Funds Management story shows vividly.
- For eligible start-up employees, a statutory ability to defer the tax bill on ESOP gains (explained in the taxation section below), easing the cash-flow burden of exercising options.
- A stake that typically costs nothing upfront to receive (only the exercise price is payable later, and only if the employee chooses to exercise).
6. Who Is Eligible for an ESOP?
Eligibility rules flow primarily from Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, read with Section 62(1)(b) of the Companies Act, 2013, and — for listed companies — the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. In general terms:
6.1 Who can be granted options
- A permanent employee of the company, working in India or outside India.
- A director of the company, whether whole-time or otherwise (subject to conditions).
- An employee or director of a holding company or subsidiary company of the issuing company.
6.2 Who is usually excluded
- An independent director of the company (they may not be granted ESOPs, to preserve their independence).
- A promoter, or any person belonging to the promoter group.
- A director who, directly or indirectly, holds more than 10% of the outstanding equity shares of the company (through themselves or their relatives).
Important exception: Section 62(1)(b) explicitly permits start-ups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) to extend ESOPs even to promoters and directors holding more than 10% equity, for up to 10 years from incorporation — a carve-out designed precisely because early founders and first employees are often functionally indistinguishable in a young start-up.
This is also why, at a large, non-start-up entity like SBI Funds Management, it was senior executives and professional managers — a CIO, a CFO, a Compliance Officer — who benefited from the ESOP scheme, rather than the institutional promoters, SBI and Amundi, who are excluded from such grants by definition.
7. The Legal and Regulatory Framework Governing ESOPs in India
ESOPs in India sit at the intersection of three separate bodies of law, and a compliant scheme has to satisfy all three simultaneously:
Framework | What it governs |
Companies Act, 2013 (Section 62(1)(b)) + Companies (Share Capital and Debentures) Rules, 2014 (Rule 12) | Corporate law mechanics: shareholder approval, minimum vesting period, disclosure in the board’s report, and the process for private and unlisted public companies. |
SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 | Additional, stricter rules for listed companies — trust structures, disclosure to stock exchanges, pricing, and lock-in on IPO-stage options. |
Income-tax Act, 1961 | Taxation of ESOPs at two stages — as a salary perquisite on exercise, and as capital gains on eventual sale — discussed in detail below. |
FEMA / RBI regulations (for cross-border grants) | Where an Indian employee is granted options by a foreign parent company, or vice versa, additional foreign-exchange reporting and pricing conditions apply. |
A key structural requirement under Rule 12 is that there must be a minimum vesting period of one year between the grant of an option and its vesting — a safeguard designed to prevent options being used as an instant cash-equivalent bonus rather than a genuine, long-term retention tool.
8. How a Company Can Issue an ESOP: The Practical Process
For a company evaluating whether and how to set up an ESOP, the process typically unfolds in the following sequence:
- Board approval of the scheme. The board of directors approves the broad contours of the ESOP — the total pool size (commonly 5–15% of paid-up equity, though there is no statutory cap), eligibility criteria, vesting conditions, and exercise mechanics.
- Shareholder approval. Because an ESOP effectively reserves a slice of future equity for employees, Section 62(1)(b) requires approval by a special resolution of shareholders — a higher bar than an ordinary resolution, needing at least 75% of votes cast in favour.
- Drafting the scheme document. A formal ESOP scheme / trust deed is drafted, laying out the pool size, vesting schedule, exercise price methodology, exercise window, treatment on resignation/termination/death, and dispute-resolution mechanics. Listed companies typically route this through an ESOP trust as required under SEBI’s 2021 regulations.
- Grant letters to employees. Individual employees are identified and issued grant letters specifying the number of options, the exercise price, and the applicable vesting schedule — this is the point at which the SBI Funds Management-style tranches, priced between roughly ₹39 and ₹455 over different years, would have been documented.
- Vesting period. Employees continue in employment (or meet agreed performance conditions) over the vesting period, subject to the mandatory one-year minimum gap between grant and first vesting.
- Once vested, eligible employees choose whether to pay the exercise price and convert their options into allotted equity shares — recorded through a fresh allotment by the company (not a transfer from an existing holder).
- Ongoing compliance and disclosure. The company must disclose ESOP details in its board’s report / annual accounts each year, and listed companies must additionally report to stock exchanges and comply with insider-trading and disclosure norms under SEBI regulations.
Liquidity event. Employees ultimately realise value when the company lists (as with SBI Funds Management’s July 2026 IPO), is acquired, or conducts a buyback/secondary sale that lets vested shareholders sell their holdings.
9. Risks and Practical Challenges of ESOPs
9.1 For employees
- Illiquidity risk: unlisted-company options can remain paper wealth for years, with no ready market to sell into until an IPO, acquisition, or buyback occurs.
- Cash-flow burden: perquisite tax is due at exercise even before any shares are sold, which can force employees to fund a tax bill out of pocket.
- Valuation uncertainty: for unlisted companies, FMV depends on a merchant banker’s or chartered accountant’s valuation, which can be contested or change sharply between rounds.
- Forfeiture risk: leaving the company before the cliff or before full vesting typically forfeits unvested options entirely.
9.2 For companies
- Dilution: every option exercised increases the total share count, diluting existing shareholders proportionally — pool size needs careful, forward-looking planning.
- Administrative and compliance overhead: trust structures, valuations, disclosures, and (for listed companies) SEBI reporting all add real administrative cost.
- Retention paradox: a poorly designed vesting schedule can cause a wave of resignations right after a cliff or major vesting milestone, rather than encouraging longer retention.
10. Conclusion: From Fine Print to Fortune
The SBI Funds Management IPO is a striking reminder that an ESOP is not a footnote in an employment contract — it can, over a long enough horizon, become one of the most consequential financial decisions of an employee’s career, and one of the most effective retention and alignment tools a company can deploy. What separates a story like Devinder Pal Singh’s ₹121-crore holding from an ESOP that quietly expires worthless is not luck; it is a scheme that was properly structured, properly communicated, and patiently held through vesting, exercise, and an eventual liquidity event.
Whether you are a founder deciding how large an ESOP pool to carve out, a CFO drafting scheme documents, or an employee trying to understand what that grant letter in your onboarding pack actually means, the fundamentals are the same: understand the vesting schedule, understand the exercise price, understand the two-stage tax treatment, and plan for the years between grant and liquidity — because, as SBI Funds Management’s employees have just discovered, that is where the real value is built.
Need help with ESOP structuring, compliance, or taxation?
Lal Ghai & Associates advises companies on designing compliant ESOP schemes under the Companies Act and SEBI regulations, and advises employees and executives on the tax planning around option exercise and share sales. Reach out to our team to discuss your specific situation.
Disclaimer: This article is for general informational purposes only and does not constitute legal, tax, or investment advice. ESOP rules, tax rates and thresholds are subject to change; please consult a qualified professional before making decisions based on this content. Figures relating to SBI Funds Management Limited are drawn from public reporting on its 2026 IPO and Draft Red Herring Prospectus disclosures.