INDIA: Esops escape ‘promoter’ tag - 20 July 2009

NEW
DELHI: The finance ministry plans to drop a proposal that seeks to classify
employee stock options (Esops) in a listed company as promoter







holding and
continue the current practice of counting it as public
shareholding.



The move to count employee stock options as promoter
stake would have meant additional pressure on promoters to offload stake in the
market to comply with the proposed minimum public float for remaining listed on
stock exchanges.



The rationale behind the plan for reclassifying
Esops was that employees are closer to the company than to the public and have
access to privileged information about the company. Counting them as public
shareholders could crowd out retail investors, it was felt. This was part of a
larger policy change prescribing higher minimum public shareholding to reduce
volatility in share prices and to broaden the market.



This involves
removing exemptions granted to some classes of companies such as IT firms to
stay listed with just 10% public holding. Besides an indicative public float of
25% for all listed companies, the ministry had also proposed to take a fresh
view on how to classify the holdings of employees and other entities such as
foreign institutional investors, mutual funds, private corporate bodies and
non-resident Indians. If ‘public’ includes these entities that have
special rights in a company, then floating stock would be insignificant, the
ministry had said.



But after initial discussions, the government is
not favouring the idea. To classify Esops as promoter holding, the government
will have to get into the nitty-gritty of different levels of employment and the
employee’s proximity to management, which would complicate the norms
unnecessarily, said a government official privy to the
development.



Going too deep to distinguish between top management and
ordinary employees would create new conceptual problems. A final decision on the
new norms will be taken after one more round of discussions, he said, requesting
anonymity.



The proposal, first made in early 2008, was later shelved
during the stock market meltdown as the government did not want to force
promoters to offload more stake in the market during a bear phase. But with
market stabilising and the UPA government returning to power, finance minister
Pranab Mukherjee decided to revive the plan.