IFRS 2 ESOPs in Indian Startups and Listed Companies: Practical Reality
Author
Sai Manikanta Pedamallu
Published
Reading Time
18 min read
Table of Contents
IFRS 2 ESOPs in Indian Startups and Listed Companies: Practical Reality
By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)
Lead Instructor, Global Fin X | www.globalfinx.in/manikanta
Posts 59 and 60 covered the IFRS 2 mechanics. This post covers what actually happens when those mechanics collide with how Indian companies genuinely run their ESOP programmes: buyback events that were never contemplated at grant date, option pools sized around investor expectations rather than accounting outcomes, trust structures created to avoid dilution, and a tax regime that measures the same grant at a completely different date and a completely different value from the accounting standard.
The scale is worth establishing first. Cumulative ESOP buybacks by Indian startups since 2020 have reached approximately $2 billion, and in the first quarter of 2026 alone, seven startups collectively bought back ESOPs worth close to $220 million, well ahead of the roughly $75 million recorded across the whole of 2025 and the $190 million in 2024. This is no longer a niche compensation mechanism. It is a mainstream wealth transfer channel with real accounting consequences that finance teams routinely discover after the commercial decision has already been made.
The Startup Reality: Grants Before Valuations Exist
An Indian startup granting its first ESOPs faces a problem that a listed company never encounters: there is no observable share price to anchor the grant-date fair value to.
Ind AS 102 requires the fair value of the equity instruments granted, measured at grant date. For a listed company, the underlying share price is simply the market price, and an option pricing model is layered on top. For an unlisted startup, the underlying equity value itself must first be established through a formal valuation, typically by an IBBI-registered valuer or a SEBI-registered Category I merchant banker, using discounted cash flow or net asset value methodology, before any option pricing model can be applied at all.
This creates a practical sequencing issue that catches founders repeatedly. The valuation must exist as at the grant date. A company that grants options in April and commissions its valuation in October, then applies the October valuation retrospectively to the April grant, has not complied with the standard. The valuation report needs to support the value as at the actual grant date, which in practice means either commissioning the valuation before the grant or ensuring the valuer's report is explicitly dated as at the grant date.
Pool Sizing and What It Does to the Expense
Standard Indian startup practice reserves roughly 10 to 15 percent of diluted equity for the ESOP pool, with seed-stage companies typically at the 10 to 12 percent end, sized to support perhaps 15 to 20 key hires over an 18 to 24 month horizon. Investors generally expect this pool to be created pre-money, before their investment, so that the dilution falls on existing shareholders rather than on the incoming investor.
The accounting consequence of pool sizing is indirect but real: a larger pool granted early, at a low valuation, produces a lower total accounting expense than the same percentage granted later at a higher valuation. A company that grants generously at seed stage locks in low grant-date fair values that never get remeasured, however spectacularly the company subsequently grows. A company that holds back its pool and grants at Series C valuations carries a materially higher P&L charge for economically equivalent employee ownership.
This is one of the genuinely counterintuitive features of equity-settled accounting: the company whose share price rose tenfold after grant records no additional expense at all, while the company that granted at the higher price records the full higher amount.
The Underwater Option Problem and Its Accounting Tail
A recurring design error in Indian startup ESOP schemes is setting the exercise price at the fair market value prevailing at the time of grant, on the reasoning that this is the conservative or defensible choice. If growth stalls or the company goes through a down round, employees end up holding options with an exercise price above the current fair market value: underwater options with no real economic value and, consequently, no retention effect at all.
The commercial response is usually a repricing. The accounting response, covered in Post 60, is unforgiving: repricing is a beneficial modification. The original grant-date expense continues to be recognised in full over the original vesting period, and the incremental fair value created by the repricing is recognised on top, over the remaining vesting period. A company that reprices to fix a retention problem has not reduced its ESOP charge; it has increased it.
This is worth stating plainly because it surprises founders and CFOs consistently. Repricing feels like an admission that the original grant was worth less than expected, so the intuitive expectation is that the expense should fall. It does not. The floor never moves.
ESOP Buybacks: The Accounting Nobody Plans For
Buybacks have become the dominant liquidity mechanism in the Indian startup ecosystem. Flipkart alone has returned over $1.5 billion to employees since 2017, with its largest single event distributing approximately $700 million in 2023 following the PhonePe separation, and a further performance-linked tranche in 2026 priced at around Rs. 713 per option. Swiggy has run multiple liquidity events, cumulatively enabling over Rs. 1,000 crore of ESOP liquidity across more than 3,200 employees, alongside the wealth created through its IPO. BrowserStack led 2026 activity with a $125 million programme covering both employees and early investors.
The accounting question a buyback raises is whether it constitutes a settlement of the award, and the answer depends on the mechanics of the specific programme.
Where a company repurchases vested options or shares from employees for cash, at fair value, this is a settlement of an equity-settled award. The payment is accounted for as a deduction from equity, except to the extent it exceeds the fair value of the equity instruments at the repurchase date, in which case the excess is recognised as an expense in profit or loss.
Where a company repurchases unvested options, this is a cancellation, triggering accelerated recognition: all remaining unrecognised expense is recognised immediately in the period of cancellation.
The practical trap: a buyback priced at a premium to the independently assessed fair value, perhaps to reward loyalty or to compensate for a valuation decline elsewhere in the group, creates a P&L expense for the excess. The Flipkart 2023 event, structured explicitly as compensation for the value decline following the PhonePe spin-off, is precisely the kind of arrangement where the relationship between the buyback price and the underlying fair value at the repurchase date drives whether an additional expense arises.
Finance teams frequently discover this after the buyback price has been announced to employees, at which point the accounting outcome is fixed.
ESOP Trusts: The Treasury Share Mechanic
Indian companies, particularly listed ones, commonly route ESOP schemes through a trust rather than issuing fresh shares on every exercise. The commercial motivation is dilution management: fresh issuance on each exercise increases total share capital and dilutes existing shareholders, whereas a trust holding shares acquired from the secondary market can satisfy exercises without any new issuance.
Section 67 of the Companies Act would otherwise prohibit a company from providing financial assistance for the purchase of its own shares; the trust structure, operating within the SEBI SBEB framework, is the compliant route to achieve this. Under the SBEB Regulations, where a scheme involves secondary acquisition of existing shares, the trust route is mandatory, with annual acquisition by the trust capped at two percent of paid-up equity, subject to an aggregate cap.
The Consolidation Consequence
The accounting treatment of a controlled ESOP trust is where this gets genuinely important, and it connects directly back to the treasury share principles covered in Post 24.
Where the company controls the trust (which is typically the case), the trust is consolidated. Shares held by the trust are treated as treasury shares of the company, deducted from equity rather than presented as an asset. Any loan given by the company to the trust to fund the share purchases is eliminated on consolidation, since it is an intragroup balance.
The consequence: the cost of shares bought by the trust from the open market is reduced from the company's reserves at the point of purchase, not treated as an investment. Subsequent sales by the trust, whether to exercising employees or to third parties, increase reserves again. No gain or loss on these movements passes through profit or loss, because transactions in an entity's own equity instruments are equity transactions.
The Ind AS 102 expense for the grants themselves runs entirely separately and is unaffected by whether the shares are sourced through fresh issuance or through the trust. The trust mechanism changes the equity presentation and the dilution outcome; it does not change the share-based payment expense.
The Listed Company Layer: SEBI SBEB and Recent Amendments
For listed Indian companies, the SEBI Share Based Employee Benefits and Sweat Equity Regulations, 2021 govern every equity-based compensation scheme, requiring compensation committee oversight, shareholder approval by special resolution, and specific periodic disclosures to the stock exchanges covering grants, exercises, lapses, cancellations, the outstanding option pool, and any material scheme changes.
Two recent amendments are worth flagging specifically because they affect grant timing decisions and therefore, indirectly, grant-date fair value measurement.
The September 2025 amendment, introducing Regulation 9A, permits founders who are classified as promoters in a draft red herring prospectus to retain ESOPs granted at least one year before the IPO filing. Previously, founders becoming promoters faced the loss of previously granted options, creating a genuine disincentive against pre-IPO grants to founding teams. The change alters pre-IPO grant planning materially, and companies preparing for listing now have a specific one-year window to consider.
The December 2025 amendment replaced merchant bankers with IBBI-registered valuers for sweat equity valuations, effective 2 January 2026, shifting who is competent to perform the underlying valuation work that Ind AS 102 measurement ultimately depends on.
Separately, the Companies (Accounts) Amendment Rules effective 14 July 2025 expanded disclosure requirements, including share-based payment disclosure and associated governance metrics, adding a further layer to what Indian companies must publish alongside their Ind AS 102 note.
The IPO Transition: When Exit Conditions Meet Vesting Conditions
A specific complication arises in schemes where an award requires an exit event, an IPO or a trade sale, as either a vesting or an exercise condition. This is extremely common in Indian startup ESOP schemes, where the employee's realistic path to liquidity has historically depended on such an event occurring.
How this is accounted for depends on how the condition is expressed. Where the exit event must occur during the service period, it functions as a performance condition and affects the estimate of the number of awards expected to vest, with full true-up as the probability changes. Where the exit event is instead only an exercise condition, with vesting already complete on satisfaction of the service condition, the analysis differs.
The practical significance for a company approaching IPO: awards whose vesting was contingent on the IPO occurring, previously assessed as unlikely to vest and therefore carrying little or no recognised expense, suddenly require a substantial catch-up charge as the IPO becomes probable and then certain. Companies going public in India have found themselves recognising material ESOP charges in the periods immediately surrounding listing, driven not by new grants but by the revised probability assessment on existing ones.
The Deferred Tax Mismatch
This is one of the most consistently mishandled areas in Indian ESOP accounting, and it arises directly from the fact that the accounting standard and the tax code measure the same grant at different dates using different values.
The Ind AS 102 expense is based on grant-date fair value, recognised over the vesting period. The Indian tax deduction available to the company, and the perquisite taxable in the employee's hands, is based on the fair market value at exercise date, less the exercise price actually paid.
These two figures are almost never the same, and the timing of recognition differs as well. The accounting expense accrues over the vesting period; the tax deduction crystallises at exercise. This produces a temporary difference requiring deferred tax recognition under Ind AS 12, with a deferred tax asset arising to the extent a future tax deduction is expected.
Where the expected future tax deduction exceeds the cumulative accounting expense recognised to date (which happens whenever the share price has risen substantially since grant, a common scenario for a successful company), the excess portion of the deferred tax asset is recognised directly in equity rather than in profit or loss, since it relates to an equity transaction rather than to the expense in the income statement.
Tracking this correctly requires the finance team to model, at each reporting date, the expected exercise-date fair market value, not merely to record the grant-date accounting expense. In practice, this is one of the more common areas where Indian companies with material ESOP programmes carry uncorrected errors.
Ind AS 102 Applicability: Who Actually Has to Do This
Ind AS 102 applies to companies within the Ind AS applicability framework generally: listed companies (with specified exclusions for SME exchange and Institutional Trading Platform entities without an IPO) and unlisted companies meeting the net worth thresholds. Critically, once the standard applies to a parent entity, it extends automatically to all subsidiaries, holding companies, and joint ventures within the group, regardless of whether those individual entities would independently cross the applicability thresholds.
Indian companies below the thresholds continue to apply the ICAI Guidance Note on Accounting for Employee Share-based Payments, which differs in several respects, including the availability of the intrinsic value method in circumstances where Ind AS 102 mandates fair value.
For a fast-growing startup, this creates a specific transition moment: crossing the net worth threshold, or being acquired by an Ind AS-applying group, triggers a shift from intrinsic value to full fair value measurement, typically increasing the recognised ESOP expense substantially and requiring careful first-time adoption treatment.
Ind AS 102 vs IFRS 2: The Indian Practical Layer
| Area | IFRS 2 | Ind AS 102 |
|---|---|---|
| Grant-date fair value measurement | Same | Same |
| Modification, cancellation, settlement mechanics | Same | Same |
| ESOP trust consolidation and treasury share treatment | Same principles under IFRS 10 and IAS 32 | Same; SEBI SBEB mandates trust route for secondary acquisition, capped at 2% of paid-up equity annually |
| Regulatory approval affecting grant date | Not applicable | SEBI SBEB shareholder approval by special resolution determines grant date for listed companies |
| Pre-IPO founder grants | Not applicable | Regulation 9A (September 2025): founders classified as promoters in the DRHP may retain ESOPs granted at least one year before IPO filing |
| Valuation professional | Varies by jurisdiction | IBBI-registered valuers replaced merchant bankers for sweat equity valuations effective 2 January 2026 |
| Disclosure requirements | IFRS 2 disclosures | Ind AS 102 disclosures plus SEBI periodic filings plus Companies (Accounts) Amendment Rules requirements effective 14 July 2025 |
| Deferred tax on ESOP | IAS 12 principles | Ind AS 12; deduction based on exercise-date FMV against grant-date accounting expense creates the temporary difference |
| Below-threshold entities | Not applicable | ICAI Guidance Note applies, permitting intrinsic value method in circumstances where Ind AS 102 requires fair value |
What Big 4 Auditors Focus On
Valuation report dating for unlisted grants. Auditors specifically test whether the valuation supporting grant-date fair value is genuinely as at the grant date, rather than a later valuation applied retrospectively to an earlier grant. This is among the most frequent findings at growth-stage Indian companies.
Buyback accounting and the fair value comparison. For any ESOP buyback event, auditors test whether the repurchase price has been compared to the fair value of the equity instruments at the repurchase date, and whether any excess has been correctly recognised as an expense rather than deducted entirely from equity.
ESOP trust consolidation. Auditors verify that a controlled ESOP trust has been consolidated, that shares held by the trust are presented as treasury shares deducted from equity rather than as an asset, and that intragroup loans to the trust have been eliminated.
Exit-condition probability assessment. For companies approaching an IPO or a sale process, auditors test whether the probability assessment on awards with exit-event conditions has been updated at each reporting date, and whether the resulting catch-up expense has been recognised in the correct period rather than deferred to the period the event actually occurs.
Deferred tax on share-based payments. Auditors test whether the deferred tax asset has been calculated using the expected exercise-date fair market value rather than the grant-date accounting expense, and whether any excess has been correctly allocated to equity rather than profit or loss.
Completeness of the grant population. Auditors trace the grants recorded in the Ind AS 102 expense calculation to the SEBI filings, the SH-6 register, board and compensation committee minutes, and the cap table, since informal or undocumented grants are a recurring source of understatement at earlier-stage companies.
Dip IFRS Exam Angle
Indian practical context does not appear directly in Dip IFRS questions, but the underlying mechanics being applied here are exactly what the exam tests.
Most tested areas connecting to this post:
Repricing as a beneficial modification: the original grant-date expense continues in full, with incremental fair value added on top.
Cancellation of unvested awards: accelerated recognition of all remaining unrecognised expense.
Settlement of vested awards: deduction from equity, with any excess over fair value at repurchase date recognised as an expense.
Performance conditions with uncertain outcomes: true-up of the number of awards expected to vest at each reporting date, with cumulative catch-up when probability changes.
Common traps that this Indian context illustrates well:
Assuming a repricing reduces the expense. It never does; the original grant-date fair value is a floor.
Deducting an entire buyback payment from equity without testing whether it exceeded fair value at the repurchase date.
Treating shares held by a controlled ESOP trust as an asset of the group rather than as treasury shares deducted from equity.
Using the exercise-date value for the accounting expense (the tax measure) rather than the grant-date value (the accounting measure).
FAQ
If a startup grants options before commissioning a valuation, can the valuation be applied retrospectively?
The valuation must support the fair value as at the grant date. A valuation performed later can be dated as at the earlier grant date if the valuer has assessed value as at that date using information available then, but simply applying a later valuation to an earlier grant does not satisfy the requirement, and auditors test this specifically.
Does an ESOP buyback reduce the accounting expense already recognised?
No. A buyback of vested awards is a settlement, accounted for as a deduction from equity, and does not reverse expense already recognised. A buyback of unvested awards is a cancellation, which accelerates rather than reduces the remaining expense.
Why does the accounting expense not increase when a startup's valuation rises tenfold after grant?
Because equity-settled awards are measured at grant-date fair value and never remeasured. The company's obligation is to deliver a fixed number of shares, and the cost of that obligation was fixed at grant date, whatever those shares subsequently become worth.
Does routing ESOPs through a trust reduce the Ind AS 102 expense?
No. The trust affects how the shares are sourced (secondary market purchase versus fresh issuance) and therefore the dilution outcome and the equity presentation, but the share-based payment expense for the grants themselves is measured and recognised identically either way.
How does a company approaching IPO account for options whose vesting depends on the IPO happening?
Where the IPO is a performance condition, the number of awards expected to vest is estimated at each reporting date based on the probability of the IPO occurring, with full cumulative catch-up as that probability increases. This commonly produces a significant expense in the periods immediately before and around listing.
Is the ESOP expense tax deductible in India?
A deduction is generally available, but measured differently from the accounting expense: based on the fair market value at exercise date less the exercise price paid, and crystallising at exercise rather than accruing over the vesting period. This mismatch in both amount and timing is precisely what generates the deferred tax complexity discussed above.
Enroll with Global Fin X
ESOP accounting in India sits at the intersection of Ind AS 102, SEBI regulation, the Companies Act, and income tax, with each framework measuring the same grant differently. Understanding where the accounting standard ends and the other regimes begin is what separates a finance professional who can implement an ESOP programme from one who can only describe it. Our programme covers the full IFRS 2 series with detailed lectures, worked examples grounded in Indian startup and listed company practice, exam-style MCQs, and a dedicated LMS for working professionals.
Enroll Now: Dip IFRS Programme
Faculty profile: www.globalfinx.in/manikanta
This is Post 61 of the Global Fin X IFRS Series. Previous: IFRS 2: Cash-Settled Awards, Modification of Terms and Group Share Plans. Next: Post 62: IAS 12 Income Taxes: Current Tax, Deferred Tax and Temporary Differences.