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Mumbai: Companies with higher institutional holdings will have a tough time issuing employee stock options (Esop) at par or at huge discount to current market price as fund managers have started voting against such resolutions as the low exercise price puts a burden on the company’s resources and is unfair to shareholders.
Proposals to issue or offer Esops by companies such as Tech Mahindra, Syngene International, Dr.
Reddy’s Laboratories, Godrej Agrovet, AU Small Finance Bank, Karnataka Bank and Karur Vysya Bank have evoked conflicting reactions from fund managers.
A resolution to issue shares of up to 50 lakh at a nominal value of 5 each under a 2018 Esop for employees and directors at an exercise price of face value was opposed by 46.17 per cent of institutional shareholders, bulk of them foreign investors.
Domestic fund managers blame their foreign counter parts for opposing Esop in many cases on the basis of recommendations of foreign proxy firms.
“Foreign fund managers strictly go by what foreign proxy advisory firms suggest, whereas an Indian fund manager votes independently,” said A Balasubramanian, chief executive officer, Birla Mutual Fund.
“It is necessary to issue Esops at decent prices to attract and retain key talent by way of rewarding their performance and to motivate them to contribute to the overall corporate growth and profitability.”
Institutional investors shot down Syngene International’s resolution to issue 1 crore Esop exercisable into 1 crore equity shares of face value of Rs 10 each.
About 66 per cent of the 68 per cent institutional investors who voted opposed the resolution.
Foreign institutional investors own 17.81 per cent in the company while domestic mutual funds own 2.14 per cent.
“Domestic fund managers vote in favour of what is right for the company in the long term as they know the company, its management and business very well,” said Nilesh Shah, CEO, Kotak Mutual Fund.
“However, companies should follow the fair value method for valuation of options for Esops,” he added.
Early this year, institutional shareholders rejected amendments to Esop scheme of Karur Vysya Bank and Dr Reddy’s.
However, in April, Karur Vysya Esop scheme 2018 at a maximum 10 per cent discount to market price was approved by shareholders.
Similarly in July, Dr.
Reddy’s modified Esop scheme too was approved by nearly 99 per cent of the institutional shareholders.
“Generally schemes with proper disclosures and broadbased coverage have gone through while schemes meant only for select people or at deep discount prices were either rejected or met with opposition,” said Harshu Ghate, co-founder and CEO, ESOP Direct.
“Globally, Esops are linked to company performance, but in India that concept yet to be popularised”.
Reliance Industries Esop scheme 2017 was opposed by 37.60 per cent institutional investors in September last year while early this month, the Esop resolution of AU Small Finance Bank was opposed by more than half the institutional investors.
“Esops are needed in some sectors to retain good talent and to create long term wealth for investors,” said Gautam Sinha Roy, senior fund manager, Motilal Oswal Mutual Fund.
“However, pricing of Esops should be objective.
It can’t be at current market price or at face value.” Domestic proxy advisors too agree that pricing of Esops must be fair to both employees and shareholders.
“Esop pricing should be case specific.
If the stock price has underperformed and the market has not valued the company’s growth, then employees must equally bear the burden as shareholders do,” said Amit Tandon, MD, Institutional Investor Advisory Services.
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Esop issue a pain for companies with big institutional holdings
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