Authored by Barrister Tasmiah Zaman, Senior Associate at Mahbub & Company and Barrister Afrin Sadia Nusrat, Associate at Mahbub & Company
As Bangladesh’s entrepreneurial landscape expands, the country’s startups and small to medium-sized enterprises (SMEs) are increasingly looking for creative ways to attract and retain skilled professionals. The steady outflow of talented individuals drawn by opportunities abroad has long been a challenge for the domestic private sector. In this environment, Employee Stock Option Plans (ESOPs) are emerging globally as a powerful tool for fostering loyalty, incentivising performance, and aligning employee interests with those of the company. While the concept has gained widespread acceptance in markets such as the United States, India and Singapore, Bangladesh is still at a formative stage in recognising and regulating ESOPs. The country’s existing corporate laws do not yet provide a comprehensive framework, creating both practical and legal complexities for companies seeking to adopt such schemes.
Understanding ESOPs
An Employee Stock Option Plan is a structured mechanism through which a company grants employees the right but not the obligation to acquire shares in the company at a predetermined price after fulfilling specific conditions. These conditions are often based on continued employment over a period of time or upon achieving defined performance goals. Unlike immediate equity transfers, ESOPs function as deferred ownership incentives that mature over time.
The central philosophy behind ESOP is to create shared ownership. When employees have a stake in the company’s growth, they are more likely to work toward its long-term success. As the business expands and its valuation increases, employees who hold vested stock options benefit from the appreciation in share value, thus participating directly in the wealth they help to create. For many startups that operate with limited cash flow, ESOPs serve as an effective alternative to traditional monetary compensation, enabling them to compete for talent on the strength of future potential rather than current financial capacity.
The Legal Challenge in Bangladesh: Section 58 of the Companies Act, 1994
Despite the growing appeal of Employee Stock Option Plans (ESOPs) as a tool for talent retention and motivation, the current legal environment in Bangladesh presents significant uncertainty regarding their implementation. At the heart of this challenge is Section 58 of the Companies Act, 1994, which codifies capital maintenance doctrine, a foundational principle aimed at protecting creditors by preventing companies from distributing capital to shareholders in ways that might undermine their solvency.
Section 58(1) expressly prohibits any company, whether public or private, from purchasing its own shares unless it undertakes a formal capital reduction process sanctioned by the High Court. This creates a general restriction on share buybacks outside the court-approved route.
More specifically, Section 58(2) prohibits companies limited by shares, other than private companies or subsidiaries of public companies, from providing financial assistance: whether directly or indirectly, and whether by means of loans, guarantees, or any other mechanism for the purpose of purchasing their own shares. A limited exception exists for companies whose ordinary business involves lending money, such as banks or financial institutions, which are permitted to extend loans in the ordinary course of business.
This legislative framework creates a narrow but important distinction: private companies and subsidiaries of public companies are not subject to the financial assistance prohibition under Section 58(2). As a result, private entities may, in principle, structure ESOP arrangements including the issuance of stock options or even share purchase plans without breaching the statutory restriction, provided the arrangements are carefully designed to avoid indirect financial assistance that might be construed as a disguised loan or guarantee.
For public companies, however, the prohibition remains a significant legal barrier. Unless the ESOP is structured in a way that clearly falls outside the ambit of Section 58(2), or unless legislative reform occurs, the scope for employee share ownership remains extremely limited.
Adding to the interpretative complexity is the statutory wording itself. Section 58(2) prohibits assistance for the “purchase” of shares but does not refer to the “subscription” of new shares. Some legal scholars argue that this omission may permit companies to issue new shares directly to employees under an ESOP since such issuance would constitute a subscription, not a purchase from existing shareholders. Moreover, stock options, being contingent rights to acquire shares in the future, may not constitute “shares” in and of themselves, suggesting that granting such options may fall outside the immediate scope of Section 58(2).
However, these interpretations, while theoretically sound, have not been judicially tested or authoritatively clarified in Bangladesh. In the absence of case law or regulatory guidance, these potential legal pathways remain speculative. As a result, companies, especially public limited ones, must proceed with caution, carefully balancing the advantages of employee equity participation against the risks of statutory non-compliance.
The Regulatory Position for Listed Companies
The regulatory landscape for listed companies offers slightly more clarity, though it remains limited to a specific context. Under the Bangladesh Securities and Exchange Commission (Public Issue) Rules, 2015, Rule 4(1)(l) permits companies undertaking an initial public offering (IPO) to allocate up to 15% of the total IPO shares to employees or other selected individuals, either at par value or at fair value, depending on the offer structure.
This rule provides a narrow statutory window through which listed companies can facilitate employee share ownership, albeit only at the point of public listing. The provision does not extend to pre-IPO share schemes or long-term ESOP arrangements, nor does it create a general framework for equity-based compensation in listed entities.
Recent regulatory developments suggest that this window may narrow further. The BSEC has proposed repealing or revising Rule 4(1)(l) in response to concerns over transparency and potential misuse of the employee share allocation mechanism during IPOs. If enacted, these changes could further restrict the use of employee share ownership strategies in the public market context.
In light of this evolving environment, listed companies must remain alert to both the opportunities and limitations posed by current rules and to the possibility of regulatory reform that may reshape how employee equity incentives can be lawfully implemented in Bangladesh.
Implementing ESOPs in Private Companies
In practice, Bangladeshi private companies, especially startups, have begun to adopt ESOP-like structures through careful contractual design. These arrangements are typically set out in a company’s Articles of Association and supplemented by a detailed ESOP agreement. Such agreements specify the terms of grant, vesting schedules, option exercise prices, and conditions under which employees may lose or retain their rights.
Some companies use a direct model which involves granting options directly to employees, while others may consider adopting a trust model, which similar to the mechanism used in the Indian jurisdiction, under which a trust is established to hold shares for the benefit of employees. Regardless of the structure, it is advisable to obtain an independent valuation of the company both at the time of granting options and upon their exercise, to ensure transparency and fairness. This practice also helps mitigate potential disputes among shareholders and employees over valuation and ownership dilution.
Benefits and Challenges
The introduction of ESOPs offers wide-ranging benefits that extend beyond employee motivation. For companies, particularly early-stage ventures, ESOPs provide a means to attract high-quality talent when cash resources are limited. By offering equity incentives, employers can compete with larger firms for skilled professionals who might otherwise seek opportunities abroad or in multinational corporations. ESOPs foster a sense of partnership and shared destiny, encouraging employees to think like owners rather than wage earners. This alignment of interests can lead to improved productivity, better decision-making, and enhanced organisational cohesion.
ESOPs also play a critical role in succession planning and long-term corporate sustainability. In family-owned or founder-led enterprises, they can facilitate generational transitions by gradually transferring ownership to key employees who understand the business deeply. Moreover, in the context of Bangladesh’s growing startup culture, ESOPs can help stem the outflow of skilled professionals by offering them a genuine stake in the nation’s emerging innovation economy.
However, these advantages come with equally significant challenges. The most immediate concern for existing shareholders is the potential dilution of ownership. Granting stock options inevitably expands the company’s equity base, which can affect voting power and profit distribution. Implementing ESOPs also entails complex legal, administrative and valuation processes. Without clear statutory guidance, companies must rely on contractual mechanisms that may not always be robust enough to address future contingencies, especially in events such as mergers, acquisitions, or corporate restructuring.
The Path Forward
The experience of other jurisdictions provides a clear blueprint for reform. Countries such as India, the United Kingdom and Singapore have modernised their corporate frameworks to explicitly accommodate employee share ownership schemes, recognising their value in promoting shared prosperity and long-term corporate growth. These jurisdictions have progressively relaxed or clarified prohibitions on financial assistance, enabling companies to align employee incentives with business performance while safeguarding shareholder and creditor interests.
Bangladesh stands to gain significantly from similar legislative and regulatory evolution. A targeted amendment to Section 58(2) of the Companies Act, 1994 explicitly allowing the implementation of employee share ownership schemes would bring much-needed legal certainty to this area. In parallel, comprehensive guidance from the Bangladesh Securities and Exchange Commission (BSEC) and the National Board of Revenue (NBR) on valuation, taxation, and disclosure requirements would create a coherent and transparent framework for responsible adoption of ESOPs.
As the country’s private sector and startup ecosystem continue to expand, the introduction of a well-defined ESOP regime could serve as a vital policy instrument for attracting, retaining, and rewarding skilled professionals. By fostering a culture of shared ownership and aligning employee interests with organisational success, Bangladesh can strengthen the foundations of an innovative, competitive and inclusive economy, one where those who contribute to growth also share in its rewards.