Owning A Piece Of The Firm
Till recently, Naresh Gupta worked in Research and Development for the San Jose-based, US $1 billion Adobe Systems, the third largest desktop software company in the US. Gupta must have built a sizeable nest-egg for himself in the two years that he was with Adobe the company offers stock options to all its permanent employees. Adobes stock price has been averaging a return of 20 per cent ever year for six years.
He will now head Adobe India, a software research and development centre which is expected to employ 125 engineers in the next year. Gupta is not an expatriate, but an employee of Adobe Systems India. However, he will still be covered by the companys stock option plan as indeed will all the other permanent employees of the Indian office.
Adobe is not an exception. Finance director of Cadence Design, Naresh Chadha, claims that his company is one of the pioneers, offering options since 1992. A long list of transnational companies offer their Indian employees some kind of stock option plan. Many are information technology companies including Microsoft, Cadence Design, Parametric Technologies, Silicon Graphics, View Logic, Oracle, Verifone, Duet Technologies, Novell, Synopsis, Hughes Software, SDRC and Texas Instruments.
A few other non-IT MNCs like Coca-Cola and Bank of America, Standard Chartered bank and Commerz Bank have also introduced schemes to share ownership. And companies like Gillette and Carrier Aircon too are exploring the process.
According to the National Centre for Employee Ownership (www.nceo.org) about 15,000 US companies share ownership. Out of these, 11,000 offer employee stock ownership plans, 2,000 offer 401 k plans (explained later), another 2,000 offer stock options to all their employees.
In an employee stock ownership plan, an employee trust holds stocks which are bought through loans. Employees can then, through a regular plan, buy these stocks from the trust at a discount. The second is a 401k plan (which is like a pension fund) whose investment plan can include the employers stocks and sometimes a company also matches an employees contribution with stocks. The third is a broad-based stock option plan. Here, an employee is given an option to buy the company stocks at a certain strike price. The option vests after a period of time. After the option vests, the employee can exercise his option at any time for a fixed number of years. When he does so he buys the stock from the employer at the strike price fixed earlier. He can then hold the stock.
If an Indian employee has to take part in any of these schemes it will mean an outflow of foreign exchange. Since India does not have capital account convertibility, Indians were not allowed to hold overseas stocks. A recent RBI circular allows employees to buy stocks worth $10,000 once in five years. This is an insignificant amount compared to even salaries and we are talking about long term retirement plans, says P S Dasgupta, partner in a Delhi-based law firm, dismissively. The $10,000 limit would mean that an employee can buy 100 $100 stocks in five years. A middle-;evel Microsoft employee in the country could get multiples of 100 stocks the day he joins (the stock is trading at over $100 now).
How, then, are these companies issuing stock options? They get permission from RBI on a case to case basis for a scheme called the cashless stock options. Cadences Chadha explains, Give RBI a solution where there is no net forex outflow. Tell them that the purchase price will be met by sale proceeds and the net gain will be remitted to India. Produce all documentary evidence of the sale. The RBI then will have no problem. This essentially means that an Indian employee cannot hold the stock, only the option to buy it. The day he exercises his option, the parent company will have to sell and remit the difference between the strike price and the market price to him.
Cadence offers options to all its Indian engineers and managers on a performance basis. They are issued at the price that the stock trades on the NYSE on that day. The number of stocks could be between 1,000 to 1,500 for an engineer with two or three years experience and could go as high as 5,000 to 6,000. They vest at the rate of 20 per cent every year. If an employee resigns, he has to exercise his option within a month; otherwise he could hold on to it for 10 years. The stock is currently trading at $54 and is increasing by 30 to 40 per cent every year.
Microsoft and Adobe offer options to employees the day they join. Microsoft uses it as a competitive strategy to attract talent. But subsequently they are performance-based. In Adobes case, the plan has been altered for India. Here, the stock option-to-salary ratio is higher. The options also vests over a longer period of time because employee retention is an issue in the Indian market.
In the US, Adobe also offers a stock purchase plan where an employee can save up to 25 per cent of his salary in a non-interest bearing account with the company and at the end of every six months, he can buy stocks at a 15 per cent discount to minimum of the open and close price. But the company is not planning to offer this scheme to Indian employees. Says Gupta, This scheme is highly regulated in the US. Since we cannot implement the same plan without change in India, we have decided not to offer it here.
However, Bank of Americas take ownership a plan for the years 1997-2002 is available to all its employees worldwide and in India. It offers all employees options but the value offered to each is small, the maximum being 1,080 stocks over five years. The options vest after a year. The difference between the notional option price and the market price will be remitted to the Indian employees account and will be treated as income. The scheme was implemented in November 1997 when the stock was around $58; it is already $74. These options can be given if a company is certain that its market value wil grow. BankAm has estimated that it can maintain growth of about 20 per cent till 2002. We will then review the scheme, says Mukesh Shivdasani, the banks human resources director.
The bank also has a performance-based scheme, probably available to about 5-10 senior employees out of its 750 employees in India. The amount involved here is high and is the same across the world at a level. Each employee gets an annual stock grant in multiples of $10,000 and also holds the stocks. There is no outflow from the employee and the bank has permission from RBI for each employee to sign a licence to hold these stocks.
Standard Chartered Bank offers an option to get a cash payment equal to any increase in the value of a number of Standard Chartered plc shares over the next three or five years. The increase is calculated from a 20 per cent discount to the current share price. The amount of options depends upon the amount that an employee saves in the local currency for three or five years. It is assumed that he earns a certain amount of interest. The employee gets the option if he completes the saving. If the stock price falls, he need not exercise the option and gets his savings back with interest.
The problem with stock options is that each case is cleared by RBI which involves a good deal of paperwork. This is why only very senior employees in Carrier Aircon get these stocks we have stayed cleared of this so far, says a spokesman from Carrier Aircon.
Arthur Andersens Mukesh Butani says, It is not clear who will pay withholding taxes. If it is treated as income in lieu of salary, the burden falls on the employer. But there is no employee-employer between the parent company and the Indian employee.
What emerges is that an employer is never sure if he is in the right. No one in the RBI is really thinking about stock option plans, says Dasgupta. There should be a policy for employers, not a contract between an employee and the RBI as it exists now.