Biggies sell

Forget year-end bonuses. India Inc’s professionals have capitalised on the market boom to make some serious money in the last quarter of 2007. With the market at record levels, several big shots encashed crores by selling part of their stock options in the last three months. While several of them pulled out a few lakhs, some big shots including Vineet Nayyar of Tech Mahindra, HDFC’s Deepak Parekh and Renu Karnad, AM Naik and VK Magapu of L&T and PB Kashyap of Ambuja Cement have grossed crores in the run-up to the new year.

The biggest gainer was Tech Mahindra MD Vineet Nayyar, who encashed Rs 23 crore last week. The head of the outsourcing firm which went public in 2006 is still sitting on a neat pile. Given the outstanding shares in his name, Mr Nayyar currently owns Tech Mahindra shares worth a little over Rs 140 crore, which would place him among the best compensated chief executives in the country.

Among other well-known names, HDFC's Deepak Parekh and Renu Karnad sold shares worth Rs 9.3 crore each in mid-December. They had earlier sold shares worth about Rs 5 crore each in late September. And that’s not all. The current value of the shares that Ms Karnad holds adds up to Rs 45.45 crore or more than $11 million, while that of Mr Parekh stands at Rs 60 crore or about $15 million.

Some of the other board members of HDFC also encashed a part of their holdings. For instance, SB Patel has encashed about Rs 1.38 crore at the fag end of October, while NM Munjee, an independent director in HDFC and currently chairman of Development Credit Bank, encashed about Rs 92 lakh through multiple transactions over the last eight weeks.

It's not just the service sector companies whose top execs have hit bull’s eye. Take engineering and construction giant Larsen & Toubro (L&T), which has been facing succession issues. The company, which had to extend the retirement age of its top management, including its chairman and managing director, has created quite a few millionaires.

L&T chairman and managing director AM Naik sold shares worth Rs 8.6 crore between end of October and early November. Among others, whole-time director VK Magapu encashed Rs 8.5 crore while RN Mukhija and KV Ramaswami pulled out approximately Rs 87 lakh and Rs 84 lakh respectively.

The top shots of L&T are still sitting on big money, given the value of their unsold shares. For instance, Mr Naik’s existing L&T shares are worth Rs 420.4 crore or a whopping $105 million, while whole-time director RN Mukhija’s shares are worth Rs 168.55 crore.

Ambuja Cements also proved to be a gold mine for its top executives. For instance, whole-time director PB Kulkarni encashed close to Rs 1.46 crore through multiple transactions since mid November. Among others Ambuja Cements MD AL Kapur sold shares worth Rs 65 lakh and BL Taparia, another whole-time director, encashed Ambuja Cements shares worth about Rs 90 lakh, as per recent disclosures to the stock exchange.

Among other companies, ITC directors SSH Rehman and Anup Singh sold shares worth Rs 1.68 crore and 1.15 crore respectively over the last two months alone. They had been regularly selling their shares for the last few months.
Telecom operator Bharti Airtel’s company secretary Vijay Sampath pulled out Rs 46 lakh about five weeks back while Matrix Labs COO S Srinivasan encashed shares worth Rs 41 lakh.

The party is not limited to execs at India-listed companies. The top management of Nasdaq-listed BPO ExlService Holdings, too, made hay while the stock traded at levels of $22-25 for the last few months.

While president & COO Rohit Kapoor has sold a portion of his shares to pocket $1.26 million or about Rs 5.04 crore in just two transactions in December, the firm’s HR head Deepak Dhawan sold his remaining 40,000 shares to take home $1 million or about Rs 4 crore. Vice-chairman & CEO Vikram Talwar too has sold some of his stock to garner about $344,873 or Rs 1.38 crore in three tranches in November and December this year.

Via ET

Govt notifies FBT norms on ESOPs

The Central Board of Direct Taxes (CBDT) today notified the long awaited norms for valuation of employee stock options (ESOPs) for the purpose of calculating fringe benefit tax (FBT).

Accordingly, the value of the ESOPs for the purpose of levy of the tax shall be the fair market value (FMV) of the option on the date of vesting, minus the amount actually paid (or recovered from) the employee.

The new rule will take effect from April 1, 2008 and will apply in relation to the assessment year 2008-2009 and subsequent years.

The Finance Act, 2007 had amended the provisions of the Income Tax Act to provide that employers will be liable to pay fringe benefit tax on the value of ESOPs granted to employees as and when the options were allotted or transferred to the employees.

Explanation (i) to clause (ba) of sub-section (1) of section 115WC of the Income-Tax Act defines fair market value to mean the value determined in accordance with the method as may be prescribed by the board. Accordingly, a new Rule 40C has been added to the Income Tax Rules for this purpose

All about ESOPS

Employee stock options (ESOPs), a compensation tool long followed in the IT sector, are gradually becoming a part of the salary package in media, retail and other high-growth sectors. What is so special about ESOPs and are they any replacement for hard cash?

An ESOP is, quite literally, an option but not an obligation to buy the shares of the company you work for. An agreement is signed with the employer that gives the employee the right to buy a specific number of shares of the company’s stock, during a specific period, and at a price that the employer specifies.

ESOP Ownership

Owning options is not the same as owning the company’s shares. It simply confers the right to buy shares of the company. The price the company sets on the stock is called the grant or exercise price. Since this must appear rewarding to the employees, it is usually lower than the market price of the share at the time the employee is given the options. Converting options into shares by paying the exercise price is known as exercise of options. Most companies have tie-ups with brokerage firms to enable this conversion process.

If your company does well and its stock price rises beyond your exercise price, you now have the option to buy shares at the exercise price and sell it at the market price for a profit. Incentive enough for you to work harder, got it?

The plus side is if the stock price goes down, then you need not really exercise the option. Nothing lost, nothing gained. . ESOPs, therefore, simply offer the carrot of potential capital gains in addition to your regular salary. To illustrate, suppose one has options to buy 100 shares of the company at an exercise price of Rs 100. The stock is currently trading in the stock market at Rs 125.

You have the choice of converting options into shares by paying Rs 100 per share and selling them at Rs 125 in the market. Voila! You have made a profit of Rs 2,500. On the other hand, if the market price of the share is Rs 75, you can choose to not exercise the option at all.

Also if you want to maintain a ‘wait and watch’ approach, in anticipation of further gains in stock price, you can sell, say 50 shares now and the remaining 50 shares later.

Timing and quantity restrictions

Another important concept with regard to ESOP is that of vesting. Vesting has two associated aspects, vesting period and vesting percentage. Vesting percentage is the portion of total options granted to the employee which he is eligible to exercise.

Vesting period is the period on completion of which the said portion can be exercised. Both of these are decided by the company and are part of the original agreement on ESOPs. So, as in the previous case, if you have been allotted options to buy 100 shares of the company, you may have a vesting period of, say, four years. There may also be a vesting percentage of 25 per cent per year.

This means that you can buy 25 shares of the company by paying the exercise price, at the end of the first year, 25 shares at the end of the second year and so on until the end of the fourth year when your options will be fully vested.

Lapse of options

It is important to know that ESOPs have an expiration date. That is, even within the vesting period, one can exercise his options only within a particular time window specified in the agreement.

If the options are not exercised within that period, they lapse. This period is called the exercise period.

If the employee decides to leave the company, he can exercise only the vested options, but all future vestings will be void.

ESOPs of unlisted companies

In unlisted companies, there is no ‘market price’ or a grant price available for an employee. The company here fixes an internal value to its shares. This is decided by the board of directors of the company through a voting system.

This value is reviewed and re-set periodically. In such cases, an employee can exercise the option if he finds it advantageous and sell the shares back to the company.

Variations of compensations

Employee stock purchase plan: The company issues shares to employees after a specific time period in the job.

A predetermined amount is withheld from the employee’s salary towards the share purchases.

Restricted stock units: This entitles the employee to receive stock or cash equivalent of the stock after a vesting period.

Tax Implications

In India, ESOPs are taxable as a fringe benefit.

Taking the sop out of ESOPs

Those of you waiting to make a quick buck on exercising your ESOPs (employee stock option plans) may have to share some of your profits with the taxman. Under the new rules proposed in the Budget, ESOPs will now be treated as fringe benefit and taxed accordingly. However, more clarity on such aspects as determination of the value of ESOPs, the rate for FBT etc. is awaited.

PAN made THE sole identification number

Be ready also with your PAN (permanent account number) card every time you invest, as the Budget proposes to make this the sole number for financial market transactions. Though various broking houses had already made PAN mandatory for trading in stocks, you can now use it for investing in mutual funds too! This essentially means that the previously proposed MIN (mutual fund identification number) is no more a must for mutual fund investments. Making PAN the sole identification number not only saves you from a lot of paper work, but would also help the government keep a close watch on your investments. With PAN becoming the most important number ever, those of you who have still not applied for a PAN, get cracking.

Tax deductions on education loans

Thanks to the new amendment introduced in the Budget, you can now get a tax deduction for educating your spouse or children! The proposed amendment allows you to deduct the amount that you pay as interest for the education loan (for your spouse or children) from your gross total income.

The facility was hitherto available only for the individual who applied for the loan. It is to be noted that the deduction would be available for eight assessment years beginning from the year in which the payment of interest on the loan begins. However, since the amendment would be effective from April 2008, you can avail yourself of the facility from the assessment year 2008-09 only.