By S&S Co. Advocates & Solicitors · Published 22 February 2026 · Informational content, not legal advice. See our disclaimer
Vesting, Exercise and the Scheme Document
An Employee Stock Option Plan (ESOP) typically grants an employee the right, but not the obligation, to purchase company shares at a pre-determined price once the options have 'vested': usually over a multi-year schedule tied to continued employment. The specific rules governing vesting, exercise windows, and what happens to options on separation from the company are set out in the ESOP scheme document and the individual grant letter, and these documents (not general assumption or industry custom) govern the outcome in any specific case.
The Common Treatment on Resignation
Most ESOP schemes provide that unvested options lapse automatically and without compensation on resignation, since vesting is designed to reward continued service. The treatment of already-vested options on resignation varies more by scheme: some schemes provide a limited post-resignation window within which vested options must be exercised or they lapse, while others may be silent or ambiguous, in which case courts have generally been reluctant to read in an implied forfeiture of an already-accrued entitlement absent clear contractual language.
Termination for Cause Versus Termination Without Cause
Many ESOP schemes distinguish between termination for cause (such as serious misconduct) (which may result in forfeiture of vested as well as unvested options) and termination without cause, which more commonly preserves at least the vested tranche subject to an exercise window. Employees facing termination should carefully review which category their scheme applies, since this distinction can have a significant financial impact.
What to Check Before Assuming an Outcome
Both employers and employees should read the specific ESOP scheme rules and the individual grant letter carefully: including the definitions of 'cause,' the exercise window following separation, whether a buy-back mechanism applies, and how the scheme treats a company-initiated exit such as retrenchment or restructuring, as distinct from a purely voluntary resignation, since these scenarios are frequently treated differently.
Frequently Asked Questions
Do unvested stock options survive resignation?
Generally no: most ESOP schemes provide that unvested options lapse automatically on resignation, since the whole purpose of vesting is to reward continued service, though the specific scheme document should always be checked.
Can an employer forfeit already-vested options just because the employee resigned?
Not automatically: this depends on the specific wording of the ESOP scheme and grant letter; where the documents are silent or ambiguous on the treatment of vested options upon resignation, courts have been reluctant to read in an implied forfeiture of an already-accrued entitlement.
Is there a time limit to exercise vested options after leaving the company?
Most schemes prescribe a specific post-separation exercise window (commonly a matter of weeks to a few months), after which unexercised vested options lapse: this window should be checked in the specific scheme document, as it varies considerably between companies.
Does termination for misconduct affect ESOPs differently than a normal resignation?
Often yes: many schemes provide for forfeiture of vested as well as unvested options where termination is for cause or serious misconduct, a materially harsher outcome than for an ordinary resignation or termination without cause, so this distinction matters significantly.
References & Further Reading
This article references the following statutory provisions. Readers should always verify current rules, fees and timelines against the applicable statute and rules as amended, since these are revised from time to time.
- Companies Act, 2013 and SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021: regulatory framework for ESOPs.
- Individual ESOP scheme rules and grant letter: the primary governing document in any specific dispute.