STOCK BASED COMPENSATION A Public Company Perspective

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STOCK BASED COMPENSATION A Public Company
Perspective

N Ramachandran Member of the Board Chief
Financial Officer iGate Global Solutions Limited
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Equity as Compensation

• Equity as an asset class is a time tested tool
  that provides one of the best opportunities for
  wealth creations
• Equity as a mode of compensation is cost
  effective for employer
• In the sprit of a true partnership the value
  created is shared

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What it does

• Attraction and retention of talent for positions
  of substantial responsibility
• Creates commonality of interest between employees
  and shareholders
• Provides great incentive and motivation to
  employees
• Encourages risk sharing between stakeholders
• Offers most tax efficient compensation for
  employees

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Employees Stock Option Plans (ESOPs)

• Grant of rights to purchase company shares at
  future date
• Employees have an option but no obligation to
  purchase
• Price is predetermined
• Price can be fair value (FV) based or at discount
  to FV
• Vesting period can be flexible minimum
  statutory period of 12 months
• Method of exercise
• Cash exercise
• Cashless exercise

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Stock Purchase Plan

• Offer of shares to employees as part of public
  issue or otherwise
• To encourage ownership of company
• Loan may be granted
• Stock Appreciation Rights (SARs)
• Monetary equivalent of increase in value of
  specified number of shares
• Generally paid in cash but can also be paid in
  shares
• To minimise cost, regulatory requirements
• Owners unwillingness to dilute

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Who Can Participate in ESOP

• Permanent employees working in India or out of
  India
• Directors of the company
• Employees or Directors of subsidiary companies in
  India or out of India or of holding company
• Employees who are promoters or belonging to
  promoter group cannot participate in ESOP
• Directors holding directly or indirectly more
  than 10 of the outstanding equity cannot
  participate in ESOP
• Options to non residents not to exceed 5 of the
  paid up Capital RBI may grant higher limit.

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ESOP Administration

• Must constitute a Compensation Committee (CC) of
  the Board to consist of majority independent
  Directors
• Prescribed particulars must be disclosed to
  prospective Option grantee
• CC responsible for framing policies and systems
  to ensure compliance with Insider Trading and
  Fraudulent and Unfair Trade Practices in
  Securities Market Regulations
• CC shall formulate terms and conditions
  including
• - quantum of Options to be granted per employee
  and in the
• aggregate
• - conditions under which vested Options may
  lapse upon termination or misconduct
• - exercise period both during employment and
  after termination
• - mode of exercise all at one time or in
  installments
• - procedure for cashless excercise

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Shareholders Approval

• ESOP must be approved by Special Resolution of
  shareholders
• Resolution must specify the exercise price
  clearly
• Approval by separate Resolution necessary for
• - grant of Stock Options of 1 or more of the
  issued capital to identified employees
  during any one year
• - grant of Stock Options to employees/Directors
  of subsidiary or holding company
• - Explanatory Statement must contain prescribed
  particulars and certain undertakings relating
  to disclosure in the Directors Report of
  accounting treatment and impact on profits
  and EPS

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Option Pricing and Vesting

• Full freedom to determine the exercise price
  subject to conforming to prescribed accounting
  policies
• Minimum vesting period of one year, thereafter
  the vesting schedule can be flexible
• For Options exchanged consequent to merger the
  period of holding the Options in the transferor
  company can be reckoned
• Options cannot be pledged, hypothecated or
  otherwise alienated and are not transferable
  except upon death
• On death while in employment all options granted
  shall vest in nominees or legal heirs
• On suffering permanent incapacity during
  employment all options granted shall vest on that
  date

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Variations in ESOP and Revision in Pricing

• No variations to the detriment of employees can
  be made
• Terms of Options offered but not exercised may be
  varied provided the variations are not
  prejudicial to the interests of employees
• Options vested or otherwise may be re-priced if
  rendered unattractive due to fall in market price
  of shares
• Re-pricing shall not be detrimental to employees
  and must be approved by shareholders

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Stock Options Linked to ADRs / GDRs

• ESOP linked with ADR / GDR offerings
• Eligible sectors
• Information Technology and Entertainment Software
• Pharmaceuticals
• Biotechnology
• Other knowledge based sectors notified by the
  Government
• 80 of the turnover should be from eligible
  sector or average turnover Rs100 crores in three
  previous financial years
• Issue of Options not to exceed 10 of the issued
  and paid up equity capital
• Issue price discount not exceeding 10 of
  market price at the time of issue of Options
• ADRs / GDRs acquired on exercise of Options
  eligible for concessional tax treatment
• Can be extended to employees of subsidiary
  companies

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Some Issues and Bottlenecks

• Listing of shares allotted pursuant to exercise
  of Options
• - cumbersome process to follow each time
  avoidable paper work
• -dealing with Registrars, Stock Exchange/s and
  Depositories
• Options priced at discount to FV lack of
  uniformity in listing process amongst Stock
  Exchanges
• Delays in listing restricts ability of employees
  to deal with the shares
• Tax allowance for Stock Option compensation cost
  in conformity with GAAP
  
  

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Lack of Single Uniform Accounting Mandate

• SEBI Regulations intrinsic value method
• ICAI
• no Accounting Standard but Guidance Note
• - recognises alternative accounting treatments
• Need for single uniform accounting mandate