Firms rush ESOPs to escape FBT liability

48 companies have given stock options since Budget day.

With the government finalising the guidelines for bringing Employee Stock Option Plans (ESOPs) under the ambit of fringe benefit tax, companies are falling over each other to allot shares to employees under this head, with seven companies creating 73 crorepati employees in the past month.

Finance Minister P Chidambaram had announced while presenting the Union Budget for 2007-08 that fringe benefit tax would be extended to ESOPs.

In the 40 days since then, 281 employees of 48 firms – including the chairman, managing director, director, whole-time director, chief executive officer, manager and whole-time director – have been allotted 66.9 million shares valued at Rs 3,465 crore under ESOPs.

Disclosures to the stock exchanges under Regulation 13(6) of the Sebi (Prohibition of Insider Trading) Regulations, 1992, show that the number of employees holding shares worth more than Rs 1 crore each increased to 192 from 119 in the previous month.

ESOPs have become an important tool in the hands of companies to retain key personnel at a time when there is an acute shortage of managerial talent.

The fringe benefit tax is expected to take the sheen off ESOPs. So companies are rushing to offer ESOPs before the tax is notified by the government.

Of the new 73 crorepati employees, 43 are from the ICICI Bank, 25 are from i-flex solutions and one each is from Larsen and Toubro, NIIT, Dabur Pharmaceuticals, Geometric Software and Aztecsoft.

Heading the individual crorepati list is Vineet Nayyar, managing director of Tech Mahindra. Nayyar holds 1.54 million shares in Tech Mahindra worth Rs 216.11 crore. He is followed by Larsen & Toubro Chairman and Managing Director A M Naik, who holds 1.04 million shares valued at Rs 165.15 crore. (see chart).

Among companies, India’s largest private sector bank, ICICI Bank, has 88 crorepati employees. These include Managing Director & Chief Executive Officer K V Kamath, who holds 6,24,500 shares valued at Rs 53.58 crore. Joint Managing Director Kalpana Morparia (Rs 36.99 crore) and Deputy Managing Director Chanda Kochhar (Rs 23.93 crore) are two other significant ESOP holders.

i-flex has 25 crorepatis, while HDFC Bank has 12 such employees. Larsen & Toubro has 11, Wipro nine and Satyam Computer has seven crorepati employees.

The Finance Bill, 2007, has included ESOPs within the ambit of the fringe benefit tax (FBT), subjecting it to the maximum marginal rate of tax for Indian companies. The proposed legislation will impose an obligation on employers to pay FBT on the fair market value of ESOP when an employee exercises the option.

The impending FBT on ESOPs has been widely criticised as defeating the primary purpose of stock options, which is to offer employees the opportunity to participate in their company’s success.