ESOP in Bangladesh:
A Legal Guide for Startups & SMEs
As the startup ecosystem in Bangladesh matures, founders are increasingly turning to Employee Stock Option Plans (ESOPs) to retain top talent. In a market where cash flow is often tight, offering equity financing is a strategic way to align employee interests with company growth.
However, implementing an ESOP in Bangladesh involves navigating complex regulations under the Companies Act, 1994. Unlike jurisdictions like Singapore or India, Bangladesh lacks a dedicated regulatory framework for ESOPs. This guide, prepared by LegalSeba LLP, demystifies the legal barriers (specifically Section 58) and outlines actionable structures for Private Limited Companies to legally issue stock options.
1. The Legal Obstacle: Capital Maintenance
The primary legal hurdle for ESOPs in Bangladesh stems from the Capital Maintenance Doctrine. This principle ensures that a company's capital remains intact for the protection of creditors.
In practice, this means companies cannot freely return money to shareholders or buy back shares. This creates a significant challenge for ESOPs, which often require a mechanism to recycle shares when employees leave. The governing law is Section 58 of the Companies Act, 1994.
2. Statutory Deep Dive: Decoding Section 58
To structure a compliant ESOP, one must understand the specific prohibitions and exemptions within the law. Here is the breakdown of the relevant statute.
Subsection (1): Buyback Prohibition
RESTRICTIVELegal Analysis
This applies to ALL companies (Public & Private). It strictly forbids a company from buying its own shares (e.g., from a departing employee) unless it goes through a complex "Reduction of Capital" process involving the High Court. This is why companies cannot simply "buy back" vested options.
Subsection (2): The Exemption
THE LOOPHOLELegal Analysis
This is the most critical clause for ESOPs. The double negative ("neither a private company...") effectively means Private Companies ARE permitted to provide financial assistance for the purchase of their own shares.
This allows a Private Company to lend money to an Employee Welfare Trust (ESOP Trust) to acquire shares, a mechanism that is illegal for Public Companies.
Subsection (3): Penalties
While the monetary fine seems low, the real risk is regulatory non-compliance, which can block future fundraising, IPOs, or result in the cancellation of the ESOP scheme.
Subsection (4): Preference Shares
Redeemable Preference Shares are exempt. However, ESOPs typically involve Ordinary Shares, so this exception is rarely applicable.
3. Structuring Your ESOP
Choosing the right legal vehicle is critical. Based on the analysis of Section 58 above, here are the four compliant models available in Bangladesh.
Model A: Direct Subscription
In this model, the company increases its Authorized Capital and issues new shares directly to employees. This is a primary market transaction.
Legal Logic
Since Section 58(1) bans buying back shares, issuing new shares (Subscription) avoids the buyback prohibition. However, once issued, these shares are hard to recover if the employee leaves.
Implementation Workflow
- Board Resolution: Allocate a percentage of Authorized Capital for the ESOP Pool.
- EGM & Sec 155 Waiver: Existing shareholders must pass a Special Resolution to waive their Pre-emption Rights (Section 155).
- Vesting: Grant Option Letters with a standard 4-year vesting schedule.
- Execution: Upon exercise, file Form XV (Return of Allotment) with RJSC.
4. Drafting the Deeds
Articles of Association (AoA)
To legalize the ESOP, you must amend your AoA via Special Resolution.
Clause: Waiver of Pre-emption
"The rights of pre-emption conferred by Section 155 of the Companies Act shall NOT apply to the allotment of shares under the ESOP Scheme..."
The Grant Letter
The contract between Company and Employee defining the rights.
Tax Consideration
Offering shares at Face Value (e.g., BDT 10) when Market Value is higher creates a taxable benefit. Consult on Fair Market Value (FMV) to manage tax liabilities. See our Company Tax Guide.
Essential Resources & Government Links
Government Authorities
- Registrar of Joint Stock Companies (RJSC) - For Form XV & 117
- National Board of Revenue (NBR) - For Income Tax Regulations
- Bangladesh Securities and Exchange Commission (BSEC)
- Bangladesh Investment Development Authority (BIDA)
LegalSeba Guides & Tools
- Personal Tax Calculator - Calculate tax on ESOP gains
- Bangladesh Company Tax Guide
- Equity Investment Mechanics
- Exit Policy for Foreign Investors
Simplify Your ESOP Journey
LegalSeba LLP specializes in corporate structuring for the Bangladeshi ecosystem. We handle the entire lifecycle: from drafting the Trust Deed and amending Articles of Association to filing returns with the RJSC.
© 2025 LegalSeba LLP. All Rights Reserved.
Disclaimer: This guide is for informational purposes only and does not constitute legal advice.
