Firms May Be Free To Price Options

The J R Varma committee, set up by the Securities and Exchange Board of India, is expected to recommend complete freedom to companies in pricing of employee stock options (ESOP). However, companies would have to adhere to special disclosure norms for the purpose.

According to sources involved in finalising the recommendations of the committee, the key issue of debate was the fixing of the price of ESOPs.

The committee is also expected to suggest necessary amendments required in the Sebi guidelines on preferential issue of shares. These recommendations will be incorporated in the final report to be submitted for consideration to the Sebi board in September.

 

"We are arriving at a consensus on the issue of granting complete freedom to companies. However, there will be certain pre-requisite that need to be satisfied for the purpose.

An approval of shareholders through a special resolution will be mandatory. At the same time, the company has to adhere to disclosures of such ESOPs in the wage bill in the balance sheet," a source said.

This implies that shares issued under the scheme will be actually part of the wages and would have to be shown in the wage bill.

"A discount to the market price would mean giving wages in shares. The company has to explain to shareholders in a specific format which will be discussed by the committee in its final meeting," the source added.

The source also said that the issue would put to rest the debate on the extent of the discount that needs to be given to employees to the market price.

Sebi preferential issue guidelines suggest a price of six monthly average for an issuance of preferential shares. "We are looking at this set of Sebi guidelines. We will present our set of recommendations on amendments. ESOPs certainly cannot be brought under the purview of these guidelines.

A fresh set of guidelines is essential for incorporating the issuance of ESOPs," the source said.

The committee debated extensively the issue of granting freedom to companies to decide on the pricing of ESOPs.

"There is nothing wrong if the company issues 100 per cent of its equity to its employees. Let it be given free of cost to them. The key issue is that following the disclosure in the balance sheet, such an issuance will result in companies taking a hit on profit or loss account. The market compulsion will automatically generate a fair value for the ESOP," a panel member commented.

The committee is also of the view that the employee will have to pay income tax on exercising the option.