Institutional EYE

Commentary on Corporate Governance Issues

IiAS’ recommendation to vote against Employees Stock Options Scheme, 2018 of ICRA Limited.

ICRA Limited yesterday filed its response with stock exchanges on voting recommendations made by proxy advisory services firms regarding the resolutions that ICRA Limited is presenting in its recent Annual General Meeting.

In its voting recommendation report, IiAS had recommended that shareholders vote against the ESOP 2018 scheme. Under this scheme, the 39,993 options remaining out of the earlier expired scheme would be made available for grant. Under ESOS 2018 scheme, the exercise price will be determined by the Nomination and Remuneration Committee, subject to a minimum of the face value per share. The company has, in the past, granted stock options at a significant discount to market price of Rs.330.0 per share i.e the IPO price. If the shares are to be issued at Rs. 330.0, the impact on profitability is estimated at Rs.41.1 mn or 4% of FY2018 profits.

To arrive at our recommendation, we consider the exercise price that the company provides in the Notice. In the absence of such information we either assume the historical exercise price as the exercise price for the scheme or we consider the lowest end of the range. In this case, we have considered the historical exercise price of Rs. 330.0 per share as the exercise price. We follow this practice for all the companies that we cover.

Our contention is that ESOPs are ‘pay at risk’ options that employees accept at the time of grant. The inherent assumption of an ESOP scheme is that there could be possible downside risks – and that employees may not be rewarded in case of adverse stock price movements. Here the downside risk is protected by issuing options at a significant discount.

The SEBI ESOP regulations do allow the company the freedom to determine the exercise price of the options granted. However, as a good practice companies should seek to align the interests of both shareholders and employees. Should the company have presented the exercise price to be the market price/ or very closely aligned with the market price, IiAS would have supported such a resolution.

If the ultimate decision regarding the exercise price of the proposed scheme rests with the NRC, there is little purpose in asking shareholders to vote on this resolution, other than for the board to tick the box that it has complied with the regulation. The company needs to let shareholders know its intent while seeking their vote.

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