SARs: stock appreciation rights vs ESOPs, with Indian examples

A stock appreciation right is a promise from the company to an employee. The company fixes a reference price when the right is granted. After a waiting period, the employee receives the rise in value above that reference price, multiplied by the number of rights.

No purchase of shares is required. If the share value goes from ₹100 to ₹180 and the employee holds 1,000 rights, the benefit is 1,000 times ₹80, which is ₹80,000. If the value falls below the reference price, the right is worth nothing, and the employee has not lost any money of their own.

A cash-settled SAR pays the gain in rupees from the company's own funds. The employee never owns shares, and the company carries a liability that grows as the share value grows. This is easy to run in a private company, since there is no need to issue shares or hold shareholder votes on dilution each time.

An equity-settled SAR pays the gain in shares. The company works out the gain, divides it by the current share value, and allots that many shares. Because new shares are issued, the rules on share issue apply, and the employee becomes a shareholder at that point.

• Cash-settled: paid in money, no shares issued, company bears a cash cost.
• Equity-settled: paid in shares, no cash out, existing holders are diluted.
• Both: the benefit is the rise in value over the reference price, not the full share value.

In an ESOP the employee has the right to buy shares at the exercise price and must pay that price. In a SAR the employee pays nothing and receives only the gain. An ESOP gives ownership, and with it voting and information rights once exercised. A cash-settled SAR gives none of these.

• Cash needed from the employee: ESOP needs the exercise price and often tax money; a cash SAR needs none.
• Ownership: ESOP ends in shares; a cash SAR ends in cash.
• Dilution: ESOP and equity SAR dilute holders; a cash SAR does not, but it is a cost to the company.
• Tax timing: ESOP is taxed at exercise and again at sale; a cash SAR is taxed when it is paid.

SARs suit a company that wants to reward people with the upside of share value but does not want to widen its shareholder list. Subsidiaries of foreign groups, businesses with tight founder control and companies close to being sold often prefer them.

They also help when shares are hard to value or hard to sell. An employee holding private shares may owe tax with no buyer in sight. A cash SAR turns the reward into money at the moment tax falls due. The cost to the company is a future cash outflow that it must plan for, and a good exit can make it large.

For listed companies, the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations 2021 define stock appreciation rights as a type of share-based benefit and set rules for schemes, including approval by shareholders and disclosures. As of November 2026 those regulations are the main framework for listed companies.

For unlisted companies, the Companies Act 2013 rules on employee stock options apply to schemes that end in shares. A purely cash-settled SAR does not issue shares, so it is generally treated as a contract on pay and bonus terms. The exact treatment depends on how the scheme is drafted, so companies usually take legal advice before launching one.

A cash-settled SAR payout is generally taxed as salary in the year the employee receives it, with the employer deducting TDS at the employee's slab rate. There is no capital gains step, because no shares are held.

An equity-settled SAR follows the ESOP pattern. When shares are allotted, the fair market value of those shares is treated as a perquisite and taxed as salary. A later sale creates capital gains over that value. The Income-tax Act 2025 applies from 1 April 2026 and carries these ideas forward under new section numbers. Check the current text, as startup-specific tax deferrals may not cover every kind of SAR.

The reference price, the vesting schedule, the settlement method, the payout cap if any, and the events that trigger payment. Some plans pay only on an exit or a listing, which means the right can sit unpaid for years. Others pay every year on a formula. The way the share value is calculated also matters, and in a private company it is usually a valuation report by an outside expert.

For the employee, the main risk is that the promise depends on the company staying able and willing to pay. A cash-settled SAR is an unsecured claim on the company, so if the business runs short of cash at the time of an exit or a bad year, payment can be delayed or disputed. Vesting conditions can also cause the right to lapse if the person leaves early.

For the company, a cash-settled plan creates a liability that rises with the share value. A strong year for the business can mean a large payout at the very time cash is needed elsewhere. Accounting rules usually require the company to show this liability and update it each period, so the plan can affect reported profit. Companies that use SARs often model several exit values to see what the cash cost would be.

Stories about layoffs, acquisitions or IPO preparations sometimes mention that employees held cash-linked rights, phantom shares or SARs, and that the plan paid out or lapsed on the deal. The mention usually matters because it shows how much the exit costs the company beyond the price paid by the buyer, and whether staff share in the outcome.

A news story that mentions phantom stock, SARs or cash bonuses linked to valuation is describing the cash-settled kind. It does not give the employee shares. When reading an offer, ask whether the right pays on exit only, whether it lapses on leaving, and who bears the tax. SARs are a pay arrangement and carry company credit risk, because the money comes from the company. This is a general explainer and not tax or legal advice, so check the details with a professional.