'ESOPs act like steroids; can have side effects'

Much fancied Employee Stock Options (ESOPs) are nothing but a tool for providing "instant kick and rejuvenation" to staff and it works in a way similar to steroids energising athletes, says a book on corporate frauds.
"What steroids are to athletes, stock options are to employees. Both are capable of providing instant kick and rejuvenation - although with possibilities of serious side effects if not handled appropriately," says the book - 'Who Cheats and How? Scams, Fraud and the Dark Side of the Corporate World'.
Authored by chartered accountant and a senior corporate executive Robin Banerjee, the book provides a commentary on all sorts of scams and frauds in India and abroad.

It also gives examples of how frauds take place in the world of business in conjunction with the stock markets and the banks.
On ESOPs, Banerjee, who has worked in companies like Hindustan Unilever, Arcelor-Mittal and Thomas Cook, said that one type of fraud pertains to backdating the stock options.
Citing an example, he wrote that "assume the decision to provide stock options was taken on December 31, 2012 (vesting date) when the market price was USD 20 per share. However, in the books and papers of the company it was shown that the decision was taken on June 30, 2012 (grant date-falsified and backdated).

"In June 2012, no one knew what the price would be in December 2012. Therefore, if it was decided that the stock options would be priced at USD 16 per share, employees would be able to exercise their stock options and make USD 4 per share profit..."

The other way of fraud relating to ESOPs is through buy back of shares, the book said.
When a company makes profits and has surplus funds, even after paying taxes, one of the ways to reward the shareholders is through buy back of shares. Through this mean, the earning per share can be enhanced as the number of shares is reduced when shares are bought back.

But there are instances where the company is not doing well, yet cash is returned to shareholders through buy backs. This does not exactly constitute an accounting fraud, but is one perpetrated by its management by unnecessarily using the company's funds to meet employees' demands.
"This usually happens when some employees hold shares under the company's stock option scheme, and this is a good way to benefit them by distributing cash, which should have been logically retained within the organisation for its further growth," wrote Banerjee.