INDIA: Cos plan to reprice ESOPs to boost employees' morale - 1 Apr 2009

Cos plan to reprice ESOPs to boost employees' morale

1 Apr 2009, 0013 hrs IST, Prashant Mahesh,
ET Bureau

MUMBAI: Falling stock prices have left
many employees in a sticky situation and this is on account of their employee
stock option plan (ESOP).

The market price for the options, in several cases,
are lower than the conversion price.



Since this may have a bearing
on employee morale, a lot of companies have been considering the prospect of
repricing their employee stock options. The market regulator Securities and
Exchange Board of India (Sebi) allows the repricing of options, if the exercise
price becomes less than the market price.



Recently, companies such
as Jain Irrigation, India Infoline, Dish TV and Geojit Securities have repriced
their ESOPs. Jain Irrigation had issued ESOPs at prices between Rs 447 and Rs
560 in 2005. However, with the current market price of Rs 340, it will reprice
its stock options at the ruling market price in addition to a discount of Rs
52.20.



India Infoline, for example, has cleared a proposal to
reprice the ESOPs issued in 2007 at Rs 88 to Rs 45.3, early this year. Dish TV,
cleared a proposal to reprice ESOPs at Rs 36.10, which is much lower than the
price of Rs 75.2, it had originally settled for.



It’s not just
about Indian companies. Even foreign companies have followed suit. Earlier this
year, Google employees got a chance to exchange underwater stock options in a
1:1 ratio, under a programme intended to increase retention. The issue of
repricing ESOPs is by itself a subject of some debate.



“In
most instances, ESOPs are granted in addition to the existing market determined
cash compensation, coupled with a sink-or-swim-together philosophy. The message
here is — if markets do well, we all make money. If they don’t do
well, ESOP holders lose the potential profit, while investors actually lose
their real wealth,” said JustESOPs Founder and CEO Tarun Gulati, a company
that specialises in stock options consulting. Therefore, in certain
circumstances, repricing may not necessarily go down well with the shareholders.
They may take a view that ESOPs should make money, only if the other
shareholders have also created wealth for themselves.



To a large
extent, it depends on the message that the management wants to send out to the
option holders. They can use repricing as a corrective mechanism at time