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Sunday, June 03, 2001













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ESOP: SAY, What's happening?

Ezhil Meenakshisundaram

SOME OF the glaring omissions in the 1999 report on the stock options granted by Satyam Computer (SAY on the NYSE) were with respect to information on:

AThe number of warrants already issued. The period during which the remaining warrants, if any, would be issued;

*The issue-price of the warrants and the pricing formula;

*The lock-in or vesting period for the shares;

*Grants to senior management, if any.

June 19 1999: The Employee Stock Option Scheme Guidelines, 1999, was issued by SEBI on June 19, 1999. The highlights of the guidelines were:

*No ESOS shall be offered unless the company constitutes a Compensation Committee for the administration and superintendence of the ESOS.

*No ESOS can be offered to the employees of a company unless the company's shareholders approve ESOS by passing a special resolution at a general meeting.

*There shall be a minimum period of one year between the grant of options and the vesting of option.

*In the case of listed companies, the shares arising pursuant to an ESOS and shares issued under an Employee Stock Purchase Scheme shall be eligible for listing in any recognised stock exchange only if such schemes (ESOS or ESPS) are in accordance with these guidelines.

*With respect to options granted in any accounting period, the accounting value of the options shall be treated as another form of employee compensation in the company's financial statements.

November 16, 1999: On this day the NSE admitted for dealings on the exchange, without any lock-in period, the bonus shares in respect of the 13 lakh equity shares originally allotted to a trust under the ESOP scheme (Ref: NSE Circular: NSE/list/1999/121 dated 16.11.1999).

There is no separate reference to the shares issued under the stock option scheme, also being admitted to trading. At that point of time, as is evident from the subsequent notes to accounts in 2001, the shares were in the name of the trust.

It is to be explained by the company how shares issued to a trust, for the issue of stock options to employees, was sought and permitted for dealing on the stock exchange, before being issued to the employees.

In the notes to the accounts in 2001, the company states that warrants issued to employees may vest immediately or over two-three years. It is, therefore, difficult to understand the logic of permitting the related shares to be listed without any lock-in period.

Further, according to the extant SEBI guidelines, the company was required to submit a certificate at the time of listing of the securities that the securities had been issued as per the stock option scheme to permanent regular employees. It is difficult to understand how the company could have complied with this requirement, when all the shares are listed even before they were allotted to the employees.

The company's action has raised another ethical issue. The private trust was issued the shares in a fiduciary capacity to hold them for and on behalf of the employees. There can be two views about the fact that the trust is entitled to hold the shares in its own name and to receive dividends, offer for bonus/rights, etc. However, the trust cannot be entitled to trade the said shares or secure any benefit out of their marketability. The company by obtaining listing of the said shares without any lock-in period and before completing the issue of shares to the employees, had conferred an unintended financial leverage to a private trust. This should be viewed against the fact that the market value of the 26 lakh equity shares held by the trust ranged from Rs 418.08 crore (based on the closing price on November 17, 1999) to a high of Rs 1,855.10 crore (based on closing price on March 7, 2000), against the cost price of Rs 58.50 crore.

April 11, 2000: In the midst of the tumultuous events in the stock market and the witnessing of extraordinary stock prices, the company published its accounts for the year ended 31 March, 2000. Again only one sentence was devoted to the issue of employee stock option scheme in the notes to the accounts:

``During the year, 13 lakh equity shares of Rs 10 each were issued at a premium of Rs 440 per share to a trust created under the employee stock option scheme.''


The note does not even indicate that the price per share was cum-bonus. There is no mention of warrants being issued to any eligible employees. There is no other specific disclosure, as required by the SEBI guidelines. Ironically, there is no mention of the Associate Stock Option Plan B, approved by the members in May 1999. This failure to disclose should be viewed against the statement made by the company in its 2001 notes that the scheme for ASOP-B was established after SEBI guidelines 1999.

Reluctant disclosure

The SEBI Guidelines 1999 require the disclosure of all information related to the ESOP scheme, right from the explanatory notice for the meeting where the ESOP is to be approved. Further, the guideline requires the constitution of a compensation committee for the administration and superintendence of all aspects of the ESOP. There is no mention of a compensation committee in the last three annual reports. The note of 2001 merely states that eligible employees are granted stock options out of the said scheme in accordance with internal guidelines.

The company has all along shown a reluctance to furnish meaningful information related to the ESOP in its financial statements and reports prepared under Indian GAAP. The failure should be viewed against the stipulation in the SEBI guidelines that ``the shares arising pursuant to an ESOS and shares issued under an ESPS shall be eligible for listing in any recognised stock exchange only if such schemes (ESOS or ESPS) are in accordance with these Guidelines''.

The issues raised are not of paramount importance to the company's functioning. But they certainly show the company in poor light in terms of corporate governance. In the market conditions prevailing as on date, the genuine investor would have found it next to impossible to find logic in the actions of the company, the management, the regulator and the market. It is all the more important that companies are not allowed to be lax in complying with the disclosure requirements as per Indian GAAP. Otherwise, similar situations such as this case of stock options could make our regulations the laughing stock of the world.

This is the concluding part of the article. The first part was published on May 27.

Related links:
Corporate sector: Laughing `stock'


Section  : Opinion
Previous : Total returns matter more -- Look beyond
           dividend yields
Next     : Satyam Computer: Notes to accounts for year
           ended March 2001

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