ESOP Disclosure in DRHP: How to Read Employee Stock Options Before You Apply for an IPO

Most people who open a draft red herring prospectus go straight to the financials and the price band. The employee stock option section sits a few chapters away, in Capital Structure, and almost nobody reads it. That’s a mistake. ESOP disclosure in a DRHP tells you how many shares employees can still claim, how many of those are already vested, what they paid, and sometimes whether senior staff plan to sell soon after listing. All of that feeds into supply, dilution and the first few months of trading.

This piece walks through what the rules require, where the numbers sit in the offer document, and how to read them, using a real ESOP certificate filed for an Indian IPO in 2025.

Why ESOPs Get Special Treatment Before an IPO

An Indian company normally can’t file its draft offer document while there are convertible securities or rights floating around that could turn into equity shares later. SEBI wants the share count fixed before the public is asked to price it. Employee stock options are the big exception. Under SEBI’s ICDR (Issue of Capital and Disclosure Requirements) Regulations, outstanding options granted to employees under a compliant scheme can stay outstanding through the IPO, along with convertibles that must convert before the red herring prospectus is filed. A March 2025 amendment added a third exception for stock appreciation rights that are fully exercised before the RHP is filed, as law firm Shardul Amarchand Mangaldas noted in its ICDR amendment alert. We’ve explained how SARs work in our piece on stock appreciation rights.

So the share count you see in the DRHP is not the whole story. There’s a second, quieter pool of shares waiting behind it. The ESOP disclosure is where you measure it.

The Rules That Shape the Numbers

ESOPs in India run under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, usually called the SBEB Regulations. A handful of provisions matter when you’re reading an IPO document:

• Who counts as an employee. The definition excludes employees who are promoters or part of the promoter group, independent directors, and directors who directly or indirectly hold more than 10% of the company’s outstanding equity shares.
• Founders who become promoters. A new Regulation 9A, inserted with effect from September 8, 2025, lets an employee who is identified as a promoter or promoter group member in the draft offer document keep holding and exercising options granted at least one year before the DRHP was filed.
• Minimum vesting. There is a minimum vesting period of one year for ESOS (employee stock option schemes), with exceptions for death or permanent incapacity and for options carried over in a merger.
• Exercise price. The company is free to set the exercise price, subject to the accounting policies in the regulations. That’s why you’ll see options priced at face value in many startups.
• No shareholder rights until exercise. An option holder doesn’t get dividends or votes until shares are actually issued.
• Pre-IPO schemes after listing. Fresh grants under a scheme formed before the IPO need shareholder ratification after the IPO, and the terms of options already granted can’t be changed (by repricing or changing vesting, for instance) without a special resolution.
• Listing on exercise. Shares arising after the IPO from options granted before it get listed immediately upon exercise.

That last point is the one traders should underline. Pre-IPO options don’t disappear on listing day. They keep converting into tradable shares for years.

The Lock-In Exemption Most Investors Miss

Here’s where it gets interesting. Under Regulation 17 of the ICDR Regulations, the entire pre-issue capital held by people other than promoters is locked in for six months. But shares allotted to employees under an ESOP or ESPS before the IPO are exempt from that lock-in, according to SEBI’s FAQ on the ICDR Regulations. The same FAQ says an ESOP trust can transfer shares to employees during the lock-in period when they exercise vested options, though those employee shares are then subject to whatever lock-in the SBEB Regulations or the scheme prescribes.

The March 2025 amendment widened this. Bonus shares issued on ESOP, ESPS or SAR allotments now get the same exemption, and so do shares allotted under a SAR scheme, per the Shardul Amarchand alert linked above.

Venture funds and other pre-IPO investors sit behind a lock-in after listing. Employees holding shares from exercised options often don’t. That’s a supply source you can size before you apply.

In plain terms: if a company’s employees exercised a lot of options in the year before the IPO, some of those shares can hit the market from day one.

Where to Find ESOP Disclosure in a DRHP

Start with the Capital Structure chapter. It usually carries a section titled something like “Employee Stock Option Schemes” with a table covering, for each year and the stub period:

1. Options granted, and the number of employees who received them
2. Options vested, exercised, forfeited, lapsed or cancelled
3. Options settled in cash, if the scheme allows it
4. Options outstanding, vested and unvested
5. Exercise price, and the resultant number of equity shares after any bonus or split
6. Names of key managerial personnel and senior management who got grants, and anyone who received 5% or more of the options granted in a year
7. Fair value assumptions such as volatility and risk-free rate
8. Whether senior people intend to sell shares from exercised options within three months of listing

Many issuers back this table with a certificate from an independent chartered accountant, and some publish it on their investor pages as a material document. Then cross-check the Notes to the restated financial statements for the share-based payment expense, and the Risk Factors chapter, which often flags future dilution from ESOPs. Our explainer on ESOP dilution and diluted EPS covers how that expense flows through the profit and loss statement.

A Real Example: PhysicsWallah’s ESOP Certificate

Let’s read an actual one. For its 2025 IPO, Physicswallah Limited’s ESOP plan was certified by independent chartered accountants B.B. & Associates in a certificate dated November 4, 2025, issued for inclusion in the RHP and prospectus. The share numbers are adjusted for a bonus issue of 35 shares for every share, approved by shareholders on March 5, 2025.

The headline table looks like this:

A few things jump out once you sit with it.

Step 1: Check that the table adds up

Granted minus forfeited, minus exercised, minus cash-settled should equal outstanding. Here, 45,460,536 minus 5,844,059 minus 12,296,119 minus 1,580,482 gives exactly 25,739,876. Good. If a table doesn’t reconcile, that’s a question for the lead managers, not something to shrug off.

Step 2: Always use the resultant share column

Because of the bonus adjustment, each outstanding option here converts into roughly 3.6 equity shares (92,663,552 divided by 25,739,876). Reading the options column alone would understate the overhang by that factor. This is the single most common mistake we see people make with ESOP tables.

Step 3: Split outstanding into vested and unvested

Of the 92,663,552 resultant shares outstanding, 32,732,975 were already vested and not yet exercised. That’s about 35% of the outstanding pool that employees could exercise relatively quickly. The rest, roughly 59.9 million resultant shares, still has to vest over time.

Step 4: Look at the exercise price

The certificate shows an exercise price of ₹1 per share for options granted in FY23, FY24, FY25 and the FY26 period up to the certificate date. When the exercise price is that low against an IPO price, almost every vested option is deep in the money. Employees have little reason not to exercise once they’re allowed to sell.

Step 5: Track the pace of grants and exercises

Grants were 24,760,920 options in FY23, 8,394,390 in FY24, 4,916,324 in FY25 and 7,388,902 between April 1, 2025 and the certificate date. The number of employees receiving grants rose from 305 in FY23 to 568, then 1,021, then 1,058 in those periods. Exercises went from nil in FY23 and FY24 to 5,626,840 options in FY25 and 6,669,279 in the FY26 stub period. Rising exercises just before an IPO often mean employee shareholding is building up in tradable form.

A ₹1 exercise price and a large vested pool don’t make an IPO bad. They just tell you that employee selling is a real possibility, and you should price that in rather than be surprised by it.

Step 6: Read the “intention to sell” lines

This is the bit most investors skip. The certificate says some key managerial personnel or senior management may sell some shares allotted on exercise of their options within three months after listing. It also states that no director, KMP, senior manager or employee received options exceeding 1% of issued capital, so the separate disclosure for large holders didn’t apply. That’s a straightforward, honest answer, and it’s exactly the kind of line you want to find before you apply.

A Simple Way to Size the Overhang

Once you have the resultant share numbers, the maths is easy. Take a hypothetical company (illustrative numbers only) with 100 crore shares after the IPO, and an ESOP table showing 4 crore resultant shares outstanding, of which 1.5 crore are vested.

• Full dilution if every outstanding option is exercised: 4 crore divided by 104 crore, or about 3.8% of the enlarged share count.
• Near-term supply from vested options: 1.5 crore shares. Compare that with the free float at listing, not the total share count. If the public float is 15 crore shares, vested options alone could add 10% to tradable supply.

That second comparison is the useful one. A 3.8% dilution sounds small. A 10% addition to the float in a newly listed stock with thin trading is not small at all.

Red Flags and Reassuring Signs

Things that should make you look harder:

• A large grant shortly before the DRHP filing, especially to a few senior people at a low exercise price.
• A table that doesn’t reconcile, or one that gives only option counts without resultant shares after a bonus or split.
• Vague answers on whether senior management intends to sell after listing.
• Big share-based payment costs that the company strips out of “adjusted” profit while the dilution stays real.

Things that are generally reassuring:

• Grants spread across hundreds of employees rather than a few names.
• A clean reconciliation backed by an independent certificate.
• Clear vesting schedules that push most of the pool into later years.
• A direct statement of intent on post-listing sales, whatever it says.

Quick Checklist Before You Apply

1. Find the ESOP section in Capital Structure and any CA certificate attached as a material document.
2. Reconcile granted, forfeited, exercised, cash-settled and outstanding.
3. Use the resultant share column, not raw option counts.
4. Note the vested-but-unexercised figure and compare it with the expected free float.
5. Check the exercise price against the IPO price band.
6. Read the intention-to-sell disclosure for KMP and senior management.
7. Remember that pre-IPO ESOP shares are generally exempt from the six-month lock-in.

If you’re applying under the employee reservation rather than as a retail investor, the rules are different again; our note on the employee quota in an IPO covers that. For the full picture of evaluating an issue, start with our guide to IPO investing in India.

The ESOP table is a few pages in a document that runs to hundreds. But it’s one of the few places where the company tells you, in numbers, who else is waiting to own its shares. Fifteen minutes with it is well spent.

Disclaimer: This article is for educational purposes only and is not investment advice. The PhysicsWallah figures are taken from a publicly filed certificate and are used only to illustrate how to read ESOP disclosures; the dilution example uses hypothetical numbers. Please do your own research or consult a SEBI-registered investment adviser before making investment decisions.