The corporate world is
witnessing an overhaul of employee stock option plans (ESOPs). With
markets down, the old plans have lost their glitter, and companies are
now looking at pricing stock options afresh or issuing fresh ones.
Over half a dozen companies have
either issued fresh ESOPs or restructured their old plans.
IndiaInfoline and Indiabulls re-priced their stock options to make
them attractive. Others, including HDFC, HDFC Bank, Axis Bank,
Mastek, Religare Enterprises and Suven Life Sciences, have issued
fresh ESOPs in the recent past.
Idea Cellular, which issued ESOPs
at a price much higher than the current market price, will not price
the option plan afresh. Instead, it is working on fresh options at a
discounted price, say senior company officials.
The situation is abnormal, and
most companies’ ESOPs are under water. Their possible alternatives
are re-pricing the existing options, cancelling existing options and
issuing fresh options, with the same or altered terms, said Harshu
Ghate, managing director of ESOP Direct, a Pune-based firm which
designs more than half the ESOPs issued by companies in India.
Nobody will buy vested shares
unless there’s some difference between the market price and what the
employee has to pay. By re-pricing ESOPs or issuing fresh ones, a
company sends a strong signal to its employees that it is interested
in a long-term relationship, said Ramesh Iyer, managing director of
Mahindra & Mahindra Financial Services.
According to market experts, if an
ESOP is priced 20-30 per cent higher than the prevailing market
price, it is possible that the employee may see prices recover
enough to see his option becoming valuable.
But some companies prefer to
re-price their ESOPs. IndiaInfoline has moved a shareholder
resolution to re-price options issued in 2005 and 2007 in line with
current market prices which are much lower. The brokerage will also
plans new ESOPs, which could result in the issue of up to 50 million
new equity shares in lieu of 55 million warrants during the currency
of the scheme.
The objective of our ESOP scheme
is to get employee ownership so as to motivate them to operate with
an ownership mindset, said Kapil Krishan, chief financial officer of
IndiaInfoline. The company has proposed to increase the maximum
discount at which share options can be issued from 25 per cent to 35
per cent. The four- member team of ex-CLSA employees, namely Bharat
Parajia, H Nemkumar, Aniruddha Dange and Vasudev Jagannath, may be
eligible for options which will give them a right to buy shares
aggregating to over one per cent stake each in the company, says the
resolution placed for shareholder approval.
Indiabulls Financial Services has
cancelled ESOPs issued in 2005 and 2006, and replaced them with a
fresh series at Rs 95.95 per share.
By cancelling the old unexercised
options we can issue fresh options that are in line with the current
market price and also delay the dilution in stock that might have
otherwise happened in a few months. We believe that most companies
which have issued ESOPs that are now under water, will cancel the
old series and issue fresh ones, said Gagan Banga, chief executive
officer of Indiabulls Financial Services.
When a company cancels unexercised
ESOPs and issues fresh ones, the vesting period starts afresh. This
means employees have a to wait a certain amount of time (usually a
year) before they are allotted the right to buy shares in the future
at a pre- determined price. Experts say if the pricing ensures a
profit, it helps employee bonding.
Many companies with ESOPs have
seen their market prices fall by between 60 and 90 per cent. As a
result, the old ESOPs have no value. Resetting the prices now could
be with a view that appreciation over the next year or two could be
as high as 50 per cent. Therefore, the ESOPs will prove to be very
attractive in engendering employee loyalty, says M M Miyajiwala,
Voltas executive vice- president.
By canceling old ESOPs and issuing
a fresh series, companies can avoid amortising the difference
between the ESOP exercise price and the market price on the day of
vesting. Effectively, the cancellation will help companies boost
accounting profits, say experts. Even the fringe benefit tax is
required to be paid by companies only when the vested options are
actually exercised by employees by paying the issue price of shares,
said Ghate of ESOP Direct.
This is probably the right time to
issue ESOPs and the recalibration of these plans is just starting in
India. This instrument is seeing its second phase of development
here, where option awards are now getting more closely tied to
performance and the conditions of vesting are being tweaked to more
closely align management incentives with shareholder wealth
maximisation, said Manish Sabharwal, chairman of staffing firm