Proxy advisory firms see red over L&T issuing stock to top management

Allotment of the ESOPs took place before the RHP was filed, a L&T spokesperson said

Proxy advisory firms are protesting engineering conglomerate Larsen & Toubro (L&T)’s generous stock options issued to its top management, during the listing process of its two subsidiaries — L&T Infotech and L&T Technology Services.

“L&T’s executive directors have been opportunistic — they have generously issued themselves stock options at face value from subsidiaries before their initial public offerings (IPOs),” noted a report by proxy advisory firm Institutional Investor Advisory Services (IiAS) on Thursday.

Stock options issued in L&T Infotech increased 76 per cent from 1,800,000 prior to the company filing its Draft Red Herring Prospectus (DRHP) in April 2016 to 3,166,900 prior to the company filing the red herring prospectus (RHP) June data from IiAS report show. L&T Infotech was listed on the bourses on  July 21. The report attributed a notional gain of Rs 316.26 crore from these stock options.

“In the case of Infotech, 35 per cent of the employee stock ownership plan (ESOPs) granted have been to the board, and 19 per cent of the total pool has been granted to the non-executive directors belonging to the L&T board,” IiAS said in its report.

Between the DRHP and the RHP, the report points out, companies will have estimated the market appetite for the equity as well as arrived at a broad understanding of the price range at which the book-building process will close. “Issuing stock options this close to listing at face value is assured money, irrespective of what the vesting and exercise periods are,” the report said.

In July 2016, none of the top officials of L&T held any stock option in the company prior to its filing of its DRHP. However, by the time of filing for the RHP in August 2016, 4,145,000 stock options were issued, data shared in the IiAS report show. The report attributed a notional gain of Rs Rs.355.64 crore from these stock options. “In TechServices case, 53% of the total pool has been granted to its board, and 36% of the total pool has been granted to L&T’s board member,” the IiAS report said.

“The report is malicious and intended to mislead. In case of Tech services, the number of shares of ESOPs was mentioned in the DRHP. Allotments of the ESOPs took place before the RHP was filed,” a L&T spokesperson said.  Shriram Subramanian, managing director for proxy advisory firm Ingovern has raised similar concerns on stock options. “We have always maintained stock options cannot be given as compensation to the senior management. Large percentage of the stock options going to the senior management is not something we are in favour on,” Subramanian said. Concerned officials from the third proxy firm Stakeholders Empowerment Services (SECS) could not be reached for immediate comment.

L&T chairman A M Naik, S N Subrahmanyan, Deputy Managing Director and President, L&T and R Shankar Raman, Chief Financial Officer of L&T are amongst the top officials to whom some of these stockoptions were issued.

“Three of L&T’s board members (A M Naik, S N Subrahmanyan, and R Shankar Raman) have received stock options from Infotech and / or TechServices. Both these companies were, and continue to remain, part of the L&T group. Therefore, as board members of L&T, they are already responsible for the growth of these businesses – do they need to be rewarded separately just because these businesses are getting listed? We believe not,” IiAS said in its report. Amongst other concerns, IiAS added, the The Nomination and Remuneration Committees of both Infotech and TechServices include members of the L&T board – those that have rewarded themselves.

“The remuneration committee was made up of independent directors and non-executive directors and when the discussion on ESOPs took place the executive directors of the committee recused themselves from the meetings. Two of the independent directors of Tech services are US residents with a high level of awareness of good corporate governance,” the L&T spokesperson said.