New Cos Bill May Have Staff Stock Option

Such a provision in the Companies Act is expected to help Indian corporates retain their best talents, on the face of large-scale poaching indulged in by growing competition, especially from richer multinational corporations.

A member of the panel said: We are considering introduction of employees stock' option as it will lead to greater employee participation for higher productivity. Moreover, the scheme has been quite a success in the western countries, he added. Under the proposed scheme, Indian corporates would be allowed to offer an option to its employees to participate in its equity after a definite time frame, at a discounted price. The employees would gain substantially if the scrip appreciates when he exercises his option and conversely simply opts out if prices slip southwards.

 

However, such a provision will also require an amendment in the Income Tax Act so that the price at which the option is given (not the price at which the option is exercised) is considered for the calculation of the employees' capital gains tax. Besides, employees availing of such option should be charged a concessional rate of tax, the panel member pointed out. Thus if a company quoting at Rs 100 gives an option to its employees to buy shares at Rs 50 after 3 years, the employees stand to gain by a whopping Rs 150 per share if it touches Rs 200 after the 3-year period, which would be subjected to capital gains tax.

According to Amitav Kothari, chairman of the Assocham committee on Company Affairs: The earlier finance ministry guideline on a 5 per cent employees quota during share issues was not found to be very beneficial to employees as it allowed no price discounts. Offering shares at a discount will act as an incentive for employees to strive towards the company's prosperity as his fortunes would, in such a case, be directly linked to the company's growth.

The finance ministry guideline for employees quota which was introduced in 1992 was withdrawn three years later. The present act does not allow companies to make preferential allotments to employees at any price (pricing is fixed at the closing price average of the previous six months) or buy back their own shares from the market. For incorporation of the stock option, the act needs to amended to facilitate companies offer its shares to its employees, a Price Waterhouse official said.

Reacting to the proposed move, P R Ramesh, a senior partner with S B Billimoria & Co, said that the efficacy of the scheme would, to a large extent, depend on a change in mindset of employees. An Indian investor generally favours cash upfront and not just a piece of paper, he felt.

The scheme's success would also require a matured domestic market, where share prices can directly be correlated with a company's performance, Ramesh added.