Employee stock options under Pakistani law: making ESOPs actually work

Every funded startup in Pakistan has an option pool on its cap table. Very few have an option plan that would survive contact with a dispute, a tax audit, or a serious acquirer's diligence. The usual document is a Delaware plan with Pakistani names inserted, promising mechanics — cashless exercise, net settlement, repurchase at fair market value — that Pakistani law does not deliver on those terms. This briefing sets out, as the law stands in June 2026, what it takes to build an ESOP that works: the corporate authority, the tax treatment, the exchange-control layer for foreign parents, and the leaver mechanics that actually hold.

The corporate foundation

The starting point is section 83 of the Companies Act 2017. New shares must first be offered to existing members in proportion to their holdings; an issue to employees is a departure from that rule and needs proper authority — the shareholder approval and regulatory pathway prescribed for further issues [PRECISE MECHANISM FOR PRIVATE AND UNLISTED COMPANIES — TO BE VERIFIED BY REVIEWING LAWYER]. For public companies, a dedicated framework for employee stock option schemes has existed since the Public Companies (Employees Stock Option Scheme) Rules 2001, requiring a scheme approved by the SECP with prescribed contents [CURRENT RULES AND ANY SUCCESSOR REGULATIONS — TO BE VERIFIED]. The SECP's further-issue regulations under the 2017 Act address employee schemes more generally [COMPANIES (FURTHER ISSUE OF SHARES) REGULATIONS 2020 — SCOPE TO BE VERIFIED].

The practical consequences are three. First, the plan needs shareholder approval, not just a board resolution; an option granted without the underlying authority is a promise the company may be unable to keep. Second, the pool should be authorised as a defined number of shares, reflected in the company's filings, so that dilution is visible and pre-emption is cleanly waived. Third, every grant should be papered individually — grant letter, vesting schedule, exercise mechanics — because in a later dispute the employee's rights will be measured by the documents, not the pitch deck.

The tax treatment: section 14 is the whole game

The Income Tax Ordinance 2001 deals with employee share schemes directly in section 14, and the design of any plan should start there.

The scheme of the section, in outline: the grant of an option is not taxed. If the employee disposes of the option itself, the consideration is salary income. When the employee exercises and receives shares, the difference between the fair market value of the shares and what the employee paid — for the shares and the option — is chargeable as salary. And where the shares issued are subject to a restriction on transfer, the charge is deferred: the employee is taxed when the restriction lifts or the shares are disposed of, whichever comes first, on the value at that time [SECTION 14 MECHANICS — TO BE VERIFIED BY REVIEWING LAWYER].

Two design lessons follow. The exercise-time charge is a cash tax on a paper gain — an employee in a private company can owe tax on shares she cannot sell. Plans should either time exercise windows against liquidity events, or use the transfer-restriction deferral deliberately so that tax lands when cash does. And because the salary charge runs through the employer's withholding obligation, the company needs a valuation it can defend at each taxing point; for private shares that means a documented methodology, adopted in advance, not a number produced for the occasion. Gains after the salary charge are dealt with as capital gains on securities under the Ordinance's separate regime [APPLICABLE RATES — TO BE VERIFIED].

Foreign parents: the exchange-control layer

The hardest cases are the most common ones: a Pakistani subsidiary or team, options over the foreign parent's shares. Three exchange-control questions decide whether that plan works.

Can the employee pay the exercise price? Outward remittances from Pakistan are permitted only for authorised purposes, and the FE Manual's treatment of remittances by resident employees to acquire shares under a foreign group's employee scheme is subject to conditions and limits [CURRENT FE MANUAL PROVISION AND LIMITS — TO BE VERIFIED BY REVIEWING LAWYER]. Where remittance is constrained, cashless exercise — sell-to-cover at the moment of exercise, with no money leaving Pakistan — is usually the answer, and the plan must permit it expressly.

Can the employee hold the foreign shares? Residents' acquisition and holding of foreign securities engages the 1947 Act and the Manual, and the conditions attached to employee-scheme acquisitions typically include reporting and repatriation obligations [TO BE VERIFIED].

Must the proceeds come home? Yes — sale proceeds and dividends are ordinarily required to be repatriated through banking channels within the prescribed period [PERIOD — TO BE VERIFIED]. A plan that leaves proceeds sitting in a foreign brokerage account has converted a benefit into a compliance problem for every employee in it.

Foreign-parent plans that ignore this layer do not fail loudly. They fail quietly, years later, when an employee's foreign holding surfaces in a tax or FIA inquiry with no paper trail. The fix at design stage is cheap: route everything through an authorised dealer, keep the approvals and reporting on file, and give employees a one-page compliance note with every grant.

Leavers, buybacks and the exit problem

Pakistani company law makes the standard US repurchase mechanics harder than the imported documents assume. A company's ability to buy back its own shares is confined and conditioned — the listed-company buyback regime is statutory, and for private companies the routes are narrow [SECTIONS 88–89 COMPANIES ACT 2017 AND AVAILABLE PRIVATE-COMPANY ROUTES — TO BE VERIFIED BY REVIEWING LAWYER]. Plans should therefore prefer mechanics that do not depend on the company repurchasing: cross-purchase by founders or a holding vehicle, transfer to an employee trust that warehouses forfeited shares, or plain forfeiture of unvested options.

Good-leaver and bad-leaver definitions deserve care, because they will be tested against Pakistani employment law and the contract will be read against the drafter. Define cause by reference to conduct, not labels; state the valuation mechanism for any leaver purchase; and say expressly what happens to vested options on death, because the family's claim will otherwise arrive through the succession certificate process with no plan answer. Where the workforce is unionised or within the statutory workers' participation schemes, check the interaction before granting [TO BE VERIFIED].

What this means for you

If you are a founder, authorise the pool properly — shareholder approval, a defined share count, clean pre-emption waivers — before the next round, because investors now diligence ESOPs and repair after signing costs leverage. Paper every grant individually and adopt a valuation methodology in advance of the first exercise. Design the tax event deliberately: align exercise windows with liquidity, or use transfer restrictions so section 14 tax lands when cash does, and make sure payroll withholding is ready for it. If the shares sit in a foreign parent, build the plan around the exchange-control rules — cashless exercise, authorised-dealer routing, repatriation of proceeds — and hand employees the compliance steps in writing. And write leaver mechanics that Pakistani law can actually execute, without assuming a buyback power the company may not have. An ESOP is a promise of value years from now; the only plans that pay are the ones built under the law that will govern them when the time comes.