Stock options take the heat of meltdown 29 Oct, 2008, 0150 hrs IST,Prashant Mahesh, ET Bureau

Blue chip stocks that offer good potential

Defensive sector stocks; best bet

Time to learn your market lessons well

http://economictimes.indiatimes.com/Market_News/Stock_options_take_heat_of_meltdown/articleshow/3649428.cms

LUCKNOW:
A lot of employees never buy or sell shares. They only subscribe to Esops
(Employees Stock Option Plan) since they believe in the growth of the company
and are excited to own a part of it as a
shareholder.



Today, many
prospective employers and employees view Esops as a part of compensation. It is
a tool used to woo employees and make them stay on. However, while it was the
fringe benefit tax (FBT) on the Esops that made employees unhappy before,
it’s the fall in stock price itself that has alarmed them now. The markets
have tumbled from a high of 21,000 to 8,500 last week. Esops have thus resulted
in short-term financial losses to
employees.



Esops issued to
employees can be exercised once the vesting period comes in. The process of
converting the options granted to an employee into shares by paying the required
exercise price is referred to as the exercise of options.



Options can be vested in
various ways depending on various factors. Generally most companies vest options
over a three year time frame. Employees who have now converted their Esops are a
worried lot.



It is not just the
mid-cap stocks that are facing the heat. Employees of corporates as big as
Reliance Industries are facing the loss after exercising their options. They
exercised their Esops at Rs 1,284 while the price has slipped to Rs 1,100.
Likewise, a 32-year-old Yes Bank employee, who exercised his option at Rs 90
stands to lose since the stock price now has fallen to Rs
60.

This person took a
decision to let his shares appreciate and not sell them. He also went in for a
personal loan to furnish his house. The situation is bad for him since he is
badly placed on two counts. There is the potential loss on account of the
non-encashment of Esops and now there is a personal loan as well.



Another employee, who joined
at a later date, got his Esops at Rs 180 per share. He has not yet exercised his
option and does not intend to do so given the current market price.



With the change in the Esops
situation, the question that is being asked is whether companies will alter
their price. “Companies do think on repricing options when they are
underwater. It is allowed under Sebi guidelines and needs the
shareholders’ approval.



However, the decision to
reprice should be given a careful thought,” said an Esop consultant.
Repricing Esops, believe experts, is a tricky situation.