Beyond ESOPs: How the Corporate Laws (Amendment) Bill 2026 reshapes India’s equity compensation landscape

The Corporate Laws (Amendment) Bill, 2026 (“Bill”) was introduced in the Lok Sabha on March 23, 2026, proposing extensive amendments to the Companies Act, 2013 (“Act”) and the Limited Liability Partnership Act, 2008. The Bill draws primarily from the recommendations of the Company Law Committee Report of 2022 (“CLC Report”), as well as the recommendations of the High-Level Committee on Non-Financial Regulatory Reforms (2025). Having been referred to the Joint Parliamentary Committee (“JPC”) rather than the Standing Committee on Finance, a relatively uncommon procedural choice, stakeholders will have a meaningful opportunity to raise concerns before the legislation is finalised.

While the Bill covers a wide canvas of reforms, spanning decriminalisation, audit oversight, governance of meetings, and restructuring, its most consequential intervention for the Indian startup and growth-stage ecosystem is the formal statutory recognition of Restricted Stock Units (“RSUs”) and Stock Appreciation Rights (“SARs”). This piece examines that intervention and its immediate practical implications, alongside the connected reforms that practitioners must consider in tandem.

The problem the Bill is solving: Section 62(1)(b) and the ESOP straitjacket

Lawyers advising Indian private companies on equity compensation face a familiar problem: clients want RSUs or SARs, but the law has largely recognised only ESOPs under Section 62(1)(b). This has forced structurally different instruments into an ill-fitting ESOP framework.

The impact is significant. ESOPs require employees to pay an exercise price, often before liquidity, whereas RSUs and SARs involve no upfront cost. The lack of clear legal recognition has made it harder for Indian companies to compete for global talent.

What the Bill does: Statutory recognition of RSUs and SARs

Clause 28 expands Section 62(1)(b) to allow share issuances under “schemes linked to the value of share capital,” moving beyond traditional ESOPs. Clause 26 mirrors this in Section 42(2) under private placement. This brings the Act closer to the SEBI SBEB Regulations, 2021, aligning private company law with the regime already applicable to listed entities.

However, until the Companies (Share Capital and Debentures) Rules, 2014 are updated, these instruments will still operate within the ESOP framework. The statute has evolved; the rules have yet to catch up.

The change also implicitly covers phantom stock, bringing it within formal Board oversight rather than leaving it purely contractual, a more appropriate treatment given its financial impact on the company.

SARs and the dilution question

Among these instruments, SARs are particularly relevant from a founder-governance lens. A SAR gives the holder the upside in share value over time, typically settled in cash or shares. Where settled in cash, no new equity is issued, preserving voting control and cap table integrity while still rewarding value creation. This makes SARs especially useful in the post-Series B to pre-IPO phase, where dilution sensitivities are high.

The proposed amendment to Section 68 also matters. It extends the buy-back restrictions to “schemes linked to the value of share capital” under Section 62(1)(b), aligning them with sweat equity limits. This is a critical consideration when structuring SARs with any share-settled component.

The small company threshold: Operational relief for early-stage companies

Section 2(85) is proposed to be amended to expand the “small company” threshold, raising paid-up capital from INR 10 crore to INR 20 crore and turnover from INR 100 crore to INR 200 crore. This extends key compliance relaxations, including fewer board meetings, simplified financials, and self-declarations in place of notarised affidavits. For startups implementing RSU plans, this reduces procedural friction and speeds execution. However, this benefit must be read alongside the continuing position that RSUs will still operate within the ESOP framework until the relevant rules are updated.

NFRA: Enhanced oversight and what it means for equity valuation

NFRA is proposed to be transformed into a full-fledged statutory regulator under new Sections 132A-132K, with independent powers comparable to SEBI and IBBI, replacing its earlier limited institutional framework.

For equity compensation, this is material. RSU and SAR schemes have a balance sheet impact, and auditors will now be directly accountable. NFRA’s jurisdiction extends to any contravention within its remit, removing reliance on ICAI referrals. Valuations and disclosures must meet regulatory scrutiny, not just internal standards.

Non-compliance with NFRA orders can lead to up to six months’ imprisonment and fines up to INR 25 lakh, with civil court jurisdiction excluded, marking a clear tightening of audit oversight.

Mergers and restructuring: Fast-track amendments

For startup groups, the proposed changes to Section 233 simplify fast-track mergers by reducing approval thresholds, members from 90 per cent to 75 per cent (present and voting), and creditors from nine-tenths to three-fourths and by centralising jurisdiction before a single NCLT bench. For PE-backed structures and reverse flips (especially post GIFT City changes), this meaningfully reduces friction in using statutory mergers over contractual restructuring routes.

GIFT City and the re-shoring signal

New Section 43A proposes to permit companies incorporated in International Financial Services Centres (“IFSCs”) to issue and maintain share capital in permitted foreign currency, prepare books and financial statements in foreign currency, and use foreign currency for regulatory filings. The structural implication is significant: an IFSC company can now natively hold dollar-denominated capital, issue shares in dollars, and maintain dollar-denominated books. The principal incentive for “flipping” Indian startups to Singapore or Mauritius holding structures, the absence of a domestic jurisdiction offering equivalent flexibility in capital currency is substantially diminished by this amendment.

Alongside LLP Act changes allowing foreign currency accounting for IFSC LLPs and the new Section 57A enabling SEBI or IFSC Authority-registered trusts to convert into LLPs, the Bill signals a clear push to make GIFT City a competitive holding jurisdiction. Its success will ultimately depend on the supporting rules and the regulatory framework under the IFSCA, but the legislative intent is clear.

Decriminalisation and the recovery mechanism

The Bill decriminalises many procedural defaults, filing delays, documentation lapses, board and charge compliance, replacing criminal liability with civil penalties before adjudicating officers. It also introduces Section 454C (consent-based settlement before orders) and Section 454B (attachment of property/bank accounts for recovery).

For transactions, this makes penalties more predictable and due diligence cleaner. However, penalty levels are not uniformly increased, creating room for aggressive compliance positions. Crucially, decriminalisation does not erase the default; successor liability in share acquisitions remains fully intact.

Observations and gaps

The Bill is a significant and largely welcome reform. That said, three observations are warranted. First, the RSU and SAR recognition is incomplete without revised rules. Until the Companies (Share Capital and Debentures) Rules, 2014 are amended, companies are still navigating the ESOP construct for compliance purposes. The statute has moved; the machinery has not followed. Second, the CLC Report underlying this Bill is four years old. ESG disclosures, related party governance for private companies, and digital assets are nowhere in the picture.

The JPC reference exists precisely for stakeholders to raise these gaps and they should. Third, and most critically, the income-tax treatment of RSUs and SARs remains untouched. An RSU that vests triggers a tax liability before the employee has seen a rupee of liquidity. The 2021 amendment deferring this tax applies only to DPIIT-recognised startups. For the much larger universe of companies that will now use these instruments, the dry tax problem persists. Equity compensation reform without a corresponding income-tax amendment is, at best, half the job done.

Conclusion

The Corporate Laws (Amendment) Bill, 2026 is a substantive and directionally sound piece of legislation. The statutory recognition of RSUs and SARs resolves a long-standing structural anomaly and signals legislative acknowledgement that equity compensation in a knowledge economy cannot be reduced to a single instrument. The NFRA strengthening, the fast-track merger reforms, and the GIFT City amendments collectively address real transactional friction. Practitioners and companies should proactively review existing equity compensation structures, fast-track merger plans, and IFSC-related holding arrangements in light of the proposed changes, recognising that subordinate legislation will determine how much of the statutory intent translates into operational reality.

About the Authors: Sapna Sarda is the Founder and CEO of Outsource 360 Business Solutions. Souvik Das and Tanushree Khandelwal are Associates at Outsource 360 Business Solutions.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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