The rights issue is the Holy Grail for purists when a public company wants to increase its capital since it alone respects the shareholders rights and seeks to maintain their respective stakes in it. The company law in India to be sure respects this lofty ideal but in its eagerness to be seen as not being cast in stone, it provides for some latitude—special resolution for bypassing this ideal norm. In a country where exceptions have the knack of becoming the rule, promoters and managements latch onto this exception with alacrity to bypass retail shareholders by making preferential allotments to those who matter as well as to confer a confetti of shares on honcho.
The recent PNB Housing fracas is still fresh in mind with a proxy advisory firm digging in its heels and fiercely opposing preferential allotment in favor of certain foreign investors with deep pockets. Opposed with equal ferocity by institutional shareholders is the resolution to confer ESOP on honchos. Companies such as Asian Paints, Mindtree and Khadim have seen between 56 percent and 100 percent "against" vote by institutional investors on such resolutions in recent times though admittedly none of these resolutions has got defeated with promoters throwing their full weight behind them. Institutions seem to be instinctively seeing the same evil design they see in the preferential allotment. The truth is the two are not the same. ESOP has loftier objectives.
Infosys scripted the rags (only figuratively) to riches stories of its employees in general by rewarding them with shares of the company as part of their salaries. This democratisation of the spoils as it saw drivers and peons of the company becoming millionaires. It is another matter that it also permitted (if the apocryphal story is to be believed) one of its promoters Shibulal the rare luxury of acquiring immovable properties all over the place. A figure of 700 all over the world was bandied about a few years ago.
While Infosys chartered the democratisation path, American companies adopted it to align honcho rewards with shareholder interests. This was not possible under the percentage of profit formula that presaged ESOP and still rules the roost in a section of India Inc. Profit share tantalises the honcho into resorting to here-and-now approaches that catapult the profits immediately while condemning the company to losses in the medium and long term. Shares eschew this easy way out to increase profits through expediencies. And by providing for a vesting period before the honcho becomes a full-fledged owner of these shares his interests are aligned with the long term and hence with shareholders’. Talent too is retained.
So ESOP is not the monster that it is made out to be by the financial institutions. Aditya Puri the honcho of HDFC Bank hit the pay dirt with shares of the bank he nursed and nurtured for decades into a robust one. Let more safeguards be built into the regime by all means by say increasing the statutory vesting period as well as by providing for a mandatory clawback clause in the event it turns out in hindsight that the honcho had presided over the ruination of the company without the public getting a clue. Another reform could be to do away with the winner-takes-it-all approach some companies follow by making ESOP a unique honcho privilege to the exclusion of the garden variety employees. Let other employees too be eligible for this privilege.
To view the offer of shares to employees as undermining the retail shareholders is a myopic view and a kneejerk reflective response. Let us not foster the impression that ESOP is of a piece with preferential allotment. In 2020, the Finance Minister did the most sensible thing for startups by deferring the taxation of the perceived and notional benefits arising simply out of exercising the stock option as hitherto. From the FY2020-21, an employee receiving ESOPs from an eligible start-up need not pay tax in the year of exercising the option. The TDS on the ‘perquisite’ stands deferred to earlier of the following events:
If anything this exception made in favor of startups must be universalised. Otherwise, shares may have to be sold willy-nilly just to be able to pay taxes!
—S. Murlidharan is a CA by qualification and writes on economic issues, fiscal and commercial laws. The views expressed in the article are his own.
(Edited by : Ajay Vaishnav)
Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!
Stampede-like situation disrupts Rahul Gandhi, Akhilesh Yadav's joint rally in Uttar Pradesh
May 19, 2024 4:26 PM
Ladakh Lok Sabha election: With Independent candidate's entry, it's now a 3-way contest for BJP and Congress
May 19, 2024 4:01 PM