c.



An Employee Stock Option Plan is when the company offers its shares to the employees.Ê

An ESOP is nothing but an option to buy the company's share at a certain price. This could either be
at the market price (price of the share currently listed on the stock exchange), or at a preferential price
(price lower than the current market price).

If the firm has not yet gone public (shares are not listed on any stock exchange), it could be at
whatever price the management fixes it at.

¦.
 



Let's first explain what owning a share entails.

When you invest in shares, you do not invest in the market. You invest inthe equity shares of a
company. That makes you a shareholder or part owner in the company.

Owning an equity share means owning a share in the company business.

Companies offer their employees shares because it is considered that having a stake in the company
would increase loyalty and motivation substantially.

.

 

It depends on company policy and your designation.

There are time limits for availing this scheme. For instance, you can acquire the shares after you
complete a particular period of employment. This could be a year, even longer.

This is known as the vesting period, and generally ranges from one to five years.

If you quit your job before this period is complete, the stock options lapse.

Sometimes, the ESOPs are given in a phased out fashion -- 20% in the second year, another 20% in
the third year, etc.


 

The ESOP is not taxed on acquiring the shares.

You are taxed on the profit you make when you sell the shares or transfer them.

Transfer here refers to when you gift it to someone or transfer it to someone else under an irrevocable
deed (they now own it, not you)

. 
 

When you sell any asset you own (house, land, shares, mutual fund units, gold, debentures, bonds),
and you make a profit on the sale, it is known as capital gain.

The tax you pay on this profit is called the capital gains tax.
Capital gains tax is computed on the difference between the sale price and the issue price (the price
at which shares are offered to you).

If you sell the shares within a year of allotment (within 12 months of acquiring them), it is a short-term
capital gain.

If you sell the shares after a year of allotment (after 12 months of acquiring them), it is a long -term
capital gain.

Ñ.

 

This depends on whether you are a resident or non-resident Indian.

If you are a non-resident, it will not be taxable, as the gains occur outside India [ Images ], unless the
money is received in India.

If you are a resident in India, then you will be taxed on the gains.

Long-term capital gain is taxed at 20%.

Short-term capital gain is added to your overall income and taxed according to your slab rate.

.

 !

The taxability depends on the nature of gain at the time of sale.

If you have a short-term capital gain, you have to pay tax at the rate of 10% (plus surcharge if
applicable).

Long-term gains are exempt from tax.

". #!
  !

If you sell your shares on or after October 1, 2004, you need to pay the Securities Transaction Tax in
India.

Also the STT is leviable in abroad as per their rules.

$. %!

You use indexation when you calculate tax taking into account the inflation. This is good because it
reduces the amount of capital gain and the amount you end up paying as tax. To read more about
indexation, read All about capital gains.

Indexation is available only for long-term capital gains. Since the long-term capital gains on shares
and options are not taxable now, it is not required.

c&. %!


Long-term capital gain on shares are exempt, so this does not arise.

There is no provision to invest the short-term capital gains to avoid tax

.'

It depends on who gives them and how much the gift is worth.

¦. (


If you get a gift from a blood relative (lineal ascendant or descendant), it is exempt from tax,
irrespective of the amount.

Gifts from anyone else will be taxed. That includes gifts from your best friend as well.

Only gifts above Rs 25,000 will be taxed, though. The taxman is not interested in lesser amounts.

Î
  

   
    
 

    
   


 

 


.


)¦(&&&

Great. They will not be taxed since they are all worth less than Rs 25,000.

There are no restrictions on the number of gifts -- even if it is the same person giving you those gifts.
The restriction is only on the amount.

*. 
 

The above criteria [


  
    
  
] still holds.

. !

 

There is no specific procedure to receive a gift.

But do accept the gift in writing. You can do this via a gift deed.

Ñ.


It is a legal document that states how much you received, from whom and when.

The person making the gift and the one receiving must both sign the gift deed.

Do get it registered with the related stamp duty.

It is safer to have gift deeds for high value gifts, ie gifts worth a few lakh. These gifts could be in cash
or kind (say jewellery or property).

+




Gift tax is only applicable when you receive a gift in cash or any other instrument like a demand draft
or a cheque. It is also applicable if the person giving you the gift directly transfers the money to your
account.

It is assumed that all these amounts are without any consideration. Consideration, according to the
tax authorities, means getting something in return.
For instance, if you gift Rs 50,000 from someone who, in turn, gives you a piece of jewellery, this is
referred to as a consideration. It will be treated as a purchase, not as a gift.

Any gifts received in kind, like shares or gold, are exempt from gift tax.

"+

  

Only gifts received at marriages are exempt from tax, even if they are above Rs 25,000.

Got a gift for your anniversary? Tough luck. Anniversaries or birthdays do not qualify for this
exemption!

$+ 

There is no separate tax that is levied.

You will be taxed according to the income slab you fall under, after the gift is clubbed with your
income.

When filing returns, you will note there are various heads of income: salary, income from house
property, capital gains, profits and gains from business or profession and income from other sources.

A gift will fall under the head: Income from Other Sources.

Say you received Rs 30,000 as a gift on September 10, 2004. Let's also assume your other taxable
income (say your salary) is Rs 100,000.

So in the financial year 2004-05, your total taxable income will be Rs 130,000. The tax you need to
pay on this will be Rs 15,000 (plus education cess).

The gift is taxed in the year you receive it.

c&. 
!

) ¦(&&&

No. You need not declare it when you file your income tax returns.

î hese days, an offer letter without a footnote on employee stock options is like an angle without bait. But

let¶s face it. Not everyone who has got stock options goes home happy. Many employees across organisations
feel they have got a raw deal in their options. Sometimes, a stock market that fell after the exercise of the options
is the reason. More often, it is about the number of shares one got or the price at which they were issued. In such
cases, employers and employees differ on their interpretation of the ESOP clauses and the result is bitterness on
both sides. There are at least six traps that they must avoid to make the most out of stock option plans.

,
 ( -,
 
The appointment letter of an employee assured him that the company would grant him options soon. Based on
this, the employee gave up his options with his current employer and joined the company. But after a year, he
was still waiting for the options because the board of directors had not yet approved the scheme. In India, many
things work on good faith. But this opens up a landmine of confusion.


 
 
!"
: Enquire if an ESOP scheme is already in place. Get the commitment in writing. Do
not leave anything to be sorted out after you have joined. Ask how the quantum of options will grow as you move
up in the company. If you can afford it, hire a lawyer to vet the clauses. A promoter¶s word will not suffice
because ESOPs are decided by the company¶s compensation committee, bound by pre-set norms. Don¶t go by
oral promises.

. 
A company promised an incoming senior executive that it will give
him two percent of the paid-up capital after three years from the
date of grant. By the time the options vested on the employee, the
company¶s capital had expanded significantly. The employee
expected to be given two percent of the new capital, while the
company issued shares as per the capital at the time of joining. If
the company had specified the number of shares it intended to
issue, this confusion could have been avoided. 


 
 
!"
: Insist on exact figures. Make sure you
Ê

x # $
%
TAKE STOCK: "You pay a great deal too look at the number of shares being offered as a percentage of the
dear for what's given freely." - A Winter's total to get a better understanding of what is being given to you.
Tale

/
A company promised to grant the employee ESOPs worth Rs. 10 lakh on the date of grant. The employee
thought he will get shares worth that much without paying anything. But the company had meant that the
employee will make a benefit (potential market price ² exercise price) of Rs. 10 lakh when the options vest. The
confusion here was on two counts. He believed he didn¶t have to pay to get the benefit. And he also thought this
was an assured benefit, irrespective of the company¶s performance and stock price movements. 


 
 
!"
: The current tax regime isn¶t conducive to options being granted at a discount to
market price. Options granted at the market price have no value on the grant date.


An unlisted company, while granting options, did not clearly mention the
exit route for the employees, in case its shares were not listed. During
the vesting period, the company grew at impressive pace but was not
listed due to unfavourable market conditions. The employee wanted to
encash the value of his options but the firm said it could not do anything
since there was no market for its shares.

A company must define all the possible exit options and rank them
sequentially. If the initial public offering is the only exit route offered, it
should be mentioned clearly. The company must also
Ê

x # $
%
READ THAT FINE PRINT: I like not fair detail the uncertainty relating to stock market listing.
terms and a villain's mind"- The
Merchant of Venice

 
 
!"
: Before joining an unlisted company, do a
thorough due diligence. Also, think of all possible downsides beside the upsides. The market can be ruthless and
the IPO may never happen. Then, what is the value of the paper you hold? Insist on a non-listing exit option.



Another unlisted company offered a non-listing exit option, but there too, left a pitfall. It offered to buy back the
shares from the employees if the company had not listed on the exchanges by the exercise date. However, it
failed to specify the price. It did not mention the method of calculation either. Later, when an employee tried to
sell back his shares, he found out that the price offered by the company was much lower than his expectation.


 
 
!"
: At the very beginning, ask the company for the method of valuation if the shares
were to be sold back to it. Usually, the valuation is done by an independent agency. Get the details clarified.

½0#
A senior executive quit a multinational to join an Indian conglomerate starting a telecom venture. After joining, he
saw that there were disputes between the promoters and the CEO. Not wanting to continue in this environment,
he quit. He expected to get all the benefits accrued to him during his stay, including ESOPs. But to his horror, the
promoters denied them, claiming it was not a case of resignation. The issue remains in dispute.


 
 
!"
: Negotiate for clear severance terms. Determine what will happen to ESOPs in case
of unexpected events such as bankruptcy.

Stock option plans go awry when the employers commit the sin of over-promise and the employees that of over-
expectation. The only redemption is due diligence.

#12
34
+,
#%
!
½4



 4
 

 

Read more: http://business.in.com/article/esop/even -esops-have-a-flipside-

are-you-prepared/6522/1#ixzz153MkU83O

 04

UTI Bank, which changed its name to Axis Bank in 2007, was one of the earliest in the banking sector to
experiment with employee stock options. It launched a scheme as early as 2001, starting with the unreserved
objective of covering all employees, based on performance.

Over the years, the scheme has undergone changes, teaching the bank an important lesson: Not everybody in
the organisation wants ESOPs and even for those who do, the current market price is an important consideration.
 When Axis Bank first designed the ESOP scheme, there was much
debate about how broad-based it should be, says Snehomoy
Bhattacharya, president of human resources.

The bank chose to include all employees except the poorest performers.
³In surveys, we were below our competitors on cash performance
bonuses. Also, we did not have an aggressive variable pay plan. So, we
decided ESOPs would be a good way to compensate employees, even at
lower levels,´ he says.

At first, employees didn¶t take well to the new plan. Only when the stock
Ê

x # $
%
SPREAD THE NET WIDE: "He will price started climbing, they saw the point and embraced the scheme. The
give the devil his due"- King Henry first major change came in 2004. Axis Bank had been accounting the
IV
difference between the price at which options were granted and the
prevailing market price as an expenditure on the books. ³We noticed we were taking a hit,´ says Bhattacharya.
So, the company changed the formula for pricing the options.

It switched from the 52-week average to the previous day¶s close as the basis for the grant price. This helped the
company eliminate its accounting expenditure, and also wiped out the arbitrage the employees enjoyed between
the two prices.

The next year dealt a bigger blow to ESOPs. The government brought them under the ambit of fringe benefit tax
(FBT). Any difference between the fair market value and the vesting price came to be taxed at 33.99 percent. The
industry was enraged at what it saw as an unfair levy, but the government did not budge.

At Axis Bank, the management decided to pass on the FBT burden to employees, taking advantage of a clause
in the tax laws. This and the new pricing formula had a telling impact on the popularity of ESOPs. Employees
have exercised far fewer options from 2005 to the present than they did in the first four years of the plan. In April
2004, more than three million options were exercised, up from one million at the start in April 2001. However, in
April 2007, that number had dropped to less than 3 lakhs. The amount of wealth created had exceeded Rs. 100
crore in April 2004, but had dropped to just Rs. 10 crore in the same month three years later.

The year 2008 saw a big shift in Axis Bank¶s ESOP strategy. In April, the company decided to narrow the scope
of the plan to only employees in the middle management and above. Staff in the
lower rungs was excluded.

There were two reasons for this. Previously, the company was growing at an exponential rate, but growth slowed
down and they could not give options to everyone anymore. Also, lower level employees appreciate a cash
bonus more than an ESOP. The bank had looked at the plan as a long-term wealth creating exercise, but the
employees didn¶t.

Axis is now toying with ideas such as phantom stocks and restricted stock units. ³These options may result in
cash outflow. We want wealth creation without impacting the bank. But in these conditions, we may be forced to
explore options for better compensation of employees,´
Bhattacharya sa
Read more: http://business.in.com/article/esop/the -different-ways-to-make-
esop-work/6512/1#ixzz153PCzPGQ

.
Running an ESOP scheme at a new age bank is a challenge, but imagine
trying it out in an old-world industrial group managed by three generations
of family members. In Chennai, the 100-year-old, $3 billion Murugappa
Group with 29 companies, some of them unlisted, should have been
among the last to experiment with stock options. But in 2007, the
conservative group chose the ESOP way.

Group elders felt the need to attract professionals because the market
dynamics for Murugappa¶s key products were changing rapidly. For
instance, the group had been selling bicycles as functional products for
decades, but found new buyers looking at them as lifestyle products. The
group had to adapt quickly.

Also, Murugappa was scaling up in

insurance and non-banking finance, where
stock options were in vogue. The group
decided to restrict ESOPs to 250 senior
managers initially. There were discussions
around how the senior managers in old
economy businesses would respond. ³After
all, if it¶s at variance with what people need,
what you do doesn¶t serve any purpose,´
Ê
says Sridhar Ganesh, human resource
x # $
% director.
A GOOD LIFE: "Can one desire too much
of a good thing?" - As you Like it
But the managers were happy and eager to
take part in the scheme. There was another challenge to grapple with.
There were unlisted companies within the group with no immediate plans to
hit the capital market. Their executives also needed to be covered unde r a
similar scheme. So, Murugappa came up with the Stock Appreciation
Rights Scheme (SARS), similar to stock options but involving a cash bonus
rather than shares. SARS is based on the valuation of the unlisted
company, derived from profitability ratios and the price-to-earnings multiple
prevailing in the stock market for the relevant industry. ³If you have got
stock appreciation rights, your shares won¶t follow the vagaries of the stock
market,´ says Ganesh. The implementation of both ESOP and SARS has
gone without a hitch.
However, in the interim, Murugappa faced a challenge as the stock market
plunged. But, the recipients of the stock options, being senior managers,
understood the markets and were not very worried. In any case,
Murugappa never pitched the options as a substitute for cash. There was
some impact on ESOP¶s aspirational value. The group looked at options to
counter this. There was no need to. The stock market bounced back.

# 4
One of the first major decisions by the new management (IL&FS) at Maytas
was to grant ESOPs to employees to instill confidence and ensure retention

Read more: http://business.in.com/article/esop/t he-different-ways-to-make-

esop-work/6512/2#ixzz153PfcCGk

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


 hen BPO pioneer Raman Roy was setting up Spectramind in 2000-2001, its human resources head S.

Varadarajan offered share ownership to 500 staff members. ³We wanted to share wealth with people who helped
create the company,´ Varadarajan says. When Wipro bought out Spectramind, everyone made the equivalent of
at least a year¶s salary on their ESOP plans. Even better, turnover among the top managers was zero. Now, at
Quattro BPO Solutions, another start-up from Roy, Varadarajan heads human resources and is replicating the
ESOP experiment, covering employees from the supervisor level.

Believers like Varadarajan are growing but the pool of companies using ESOPs in India remains limited. The
wealth creation potential of ESOPs has not been fully exploited in India. The trend is yet to catch on with a large
number of firms. There are many who are sceptical. During the best of times, amid war for talent, nothing could
guarantee stickiness of executives, not even ESOPs. ³There was always somebody who was willing to better the
deal ² offer a bigger package and lure away executives,´ says Prabir Jha, HR head, Dr. Reddy¶s Labs.
 The Indian ESOP is unique in how it is implemented. It¶s used as a carrot,
dangled in front of employees so they don¶t quit. It¶s a long-term incentive
but employees don¶t seem to get the point. ESOPs ³are not considered part
of compensation in many Indian organizations and are not communicated
as such´ says Padmaja Alaganandan, India business leader (human
capital), Mercer Consulting.

This is unlike in the West, where it forms a substantial chunk of a senior

executive¶s total compensation. In the US, ESOPs are used to push
productivity, link reward to performance and align the interests of the
shareholders and executives. In India, where ESOP adoption is still in its
Ê

x # $
%
A SLICE OF THE PIE: "Why, then early stage, companies use stock options to attract and retain employees.
the world is my oyster, which I
with sword will open."- William
Shakespeare, Merry Wives of And ESOPs¶ appeal depends on the stock market. Until 2007, when the
Windsor
going was good, ESOPs were a very attractive incentive to lure potential
employees. Globally, start-ups have used ESOPs to recruit key executives, reward and share the risk with them.

Bajaj Electricals, for instance, hired staff from other sectors for as little as a 10 percent jump in salary (when 50-
100 percent increases were normal), by using attractive ESOP offers, says executive director R. Ramakrishnan.
Private banks like Axis Bank, with no global tag and not-so-deep pockets, used ESOPs to compete for talent
against multinational giants. From unlisted, family-managed entities like Murugappa group to old-fashioned
manufacturing firms like Larsen & Toubro, companies have used them to gain shine in the job market.

Then, the slowdown hit and Indian entrepreneurs were hit hard. Earlier, India¶s hot job market and economic
boom meant ESOPs got marketed as the biggest and quickest way to riches. This mis-selling made everyone
look only at the upside and forget the downsides. ³Excitement around ESOPs has waned. Unpredictable stock
market has taken the sheen off,´ says Sanjiv Sachar, speaking about the immediate aftermath. He is partner,
Egon Zehnder International, a leading executive search firm.

Compensation experts say India¶s demography too has had an impact. Across the hierarchy of positions, people
are spending less time with one job. ³Everyone prefers more cash in hand than something that¶s long-term and
uncertain,´ says Shekhar Purohit, Asia-Pacific head compensation & corporate governance, Hewitt Associates.

Now that economic recovery has begun, experts believe corporate India will see a mature ESOP. Those who do
vouch for ESOPs say there is no one formula that fits everyone at all times. An ESOP plan must be fine-tuned in
sync with a company¶s growth cycles to be effective.

Telecom major Bharti group began its ESOP journey in 2001. In its pre-IPO stage, it covered the top 100-125
executives. In 2005, it launched the second stage where everybody was covered and ESOPs were linked to the
employee¶s loyalty and performance.

On a sharp growth trajectory at that time, Bharti wanted to reward and incentivise its staff. In 2006, it offered
performance share plan to senior executives pegging the allotment to different kinds of performance ² individual,
stock price and competition. By 2008, it figured that its 2005 wide-base ESOP strategy wasn¶t working as the
younger staff preferred deferred bonus plan or cash. Hence, now the company has restricted the plan to the
middle management and above. ESOPs work ³when a company constantly does course correction and
customisation to be more current and better aligned,´ says Inder Walia, group director for HR at Bharti
Enterprises.

Now is the time to build the foundation for the next wave of ESOP adoption in the country. Here are five major
trends that may shape the future of ESOPs:

3
(3
From a plain vanilla ESOP plan, companies are now willing to experiment with variants of ESOPs to suit their
needs better. These range from phantom options to restricted stock units (RSUs), stock appreciation rights
(SARs) to performance share plans. Companies like Wipro are looking at alternative means like deep-discounted
restricted stock units to make options attractive. L&T offered SARs to avoid equity dilution and yet offer its staff
the upsides of the stock movement. Companies like Infosys are going one step ahead, giving ESOPs to
independent directors and driving board level involvement.

Read more: http://business.in.com/article/esop/esops -back-in-

fashion/6492/1#ixzz153YdZJtE

m
 


   
  

 

m


 

 

 

!"#$%&&'

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|

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|

Comment (0)




 hen BPO pioneer Raman Roy was setting up Spectramind in 2000-2001, its human resources head S.

Varadarajan offered share ownership to 500 staff members. ³We wanted to share wealth with people who helped
create the company,´ Varadarajan says. When Wipro bought out Spectramind, everyone made the equivalent of
at least a year¶s salary on their ESOP plans. Even better, turnover among the top managers was zero. Now, at
Quattro BPO Solutions, another start-up from Roy, Varadarajan heads human resources and is replicating the
ESOP experiment, covering employees from the supervisor level.

Believers like Varadarajan are growing but the pool of companies using ESOPs in India remains limited. The
wealth creation potential of ESOPs has not been fully exploited in India. The trend is yet to catch on with a large
number of firms. There are many who are sceptical. During the best of times, amid war for talent, nothing could
guarantee stickiness of executives, not even ESOPs. ³There was always somebody who was willing to better the
deal ² offer a bigger package and lure away executives,´ says Prabir Jha, HR head, Dr. Reddy¶s Labs.

The Indian ESOP is unique in how it is implemented. It¶s used as a carrot,

dangled in front of employees so they don¶t quit. It¶s a long-term incentive
but employees don¶t seem to get the point. ESOPs ³are not considered part
of compensation in many Indian organizations and are not communicated
as such´ says Padmaja Alaganandan, India business leader (human
capital), Mercer Consulting.

This is unlike in the West, where it forms a substantial chunk of a senior

executive¶s total compensation. In the US, ESOPs are used to push
productivity, link reward to performance and align the interests of the
shareholders and executives. In India, where ESOP adoption is still in its
Ê

x # $
%
A SLICE OF THE PIE: "Why, then early stage, companies use stock options to attract and retain employees.
the world is my oyster, which I
with sword will open."- William
Shakespeare, Merry Wives of And ESOPs¶ appeal depends on the stock market. Until 2007, when the
Windsor
going was good, ESOPs were a very attractive incentive to lure potential
employees. Globally, start-ups have used ESOPs to recruit key executives, reward and share the risk with them.

Bajaj Electricals, for instance, hired staff from other sectors for as little as a 10 percent jump in salary (when 50-
100 percent increases were normal), by using attractive ESOP offers, says executive director R. Ramakrishnan.
Private banks like Axis Bank, with no global tag and not-so-deep pockets, used ESOPs to compete for talent
against multinational giants. From unlisted, family-managed entities like Murugappa group to old-fashioned
manufacturing firms like Larsen & Toubro, companies have used them to gain shine in the job market.

Then, the slowdown hit and Indian entrepreneurs were hit hard. Earlier, India¶s hot job market and economic
boom meant ESOPs got marketed as the biggest and quickest way to riches. This mis-selling made everyone
look only at the upside and forget the downsides. ³Excitement around ESOPs has waned. Unpredictable stock
market has taken the sheen off,´ says Sanjiv Sachar, speaking about the immediate aftermath. He is partner,
Egon Zehnder International, a leading executive search firm.

Compensation experts say India¶s demography too has had an impact. Across the hierarchy of positions, people
are spending less time with one job. ³Everyone prefers more cash in hand than something that¶s long-term and
uncertain,´ says Shekhar Purohit, Asia-Pacific head compensation & corporate governance, Hewitt Associates.

Now that economic recovery has begun, experts believe corporate India will see a mature ESOP. Those who do
vouch for ESOPs say there is no one formula that fits everyone at all times. An ESOP plan must be fine-tuned in
sync with a company¶s growth cycles to be effective.
Telecom major Bharti group began its ESOP journey in 2001. In its pre-IPO stage, it covered the top 100-125
executives. In 2005, it launched the second stage where everybody was covered and ESOPs were linked to the
employee¶s loyalty and performance.

On a sharp growth trajectory at that time, Bharti wanted to reward and incentivise its staff. In 2006, it offered
performance share plan to senior executives pegging the allotment to different kinds of performance ² individual,
stock price and competition. By 2008, it figured that its 2005 wide-base ESOP strategy wasn¶t working as the
younger staff preferred deferred bonus plan or cash. Hence, now the company has restricted the plan to the
middle management and above. ESOPs work ³when a company constantly does course correction and
customisation to be more current and better aligned,´ says Inder Walia, group director for HR at Bharti
Enterprises.

Now is the time to build the foundation for the next wave of ESOP adoption in the country. Here are five major
trends that may shape the future of ESOPs:

3
(3
From a plain vanilla ESOP plan, companies are now willing to experiment with variants of ESOPs to suit their
needs better. These range from phantom options to restricted stock units (RSUs), stock appreciation rights
(SARs) to performance share plans. Companies like Wipro are looking at alternative means like deep-discounted
restricted stock units to make options attractive. L&T offered SARs to avoid equity dilution and yet offer its staff
the upsides of the stock movement. Companies like Infosys are going one step ahead, giving ESOPs to
independent directors and driving board level involvement.

Read more: http://business.in.com/article/esop/esops -back-in-

fashion/6492/1#ixzz153YdZJtE

m

( 
)m

*
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

Î ot long ago, the robust growth in India¶s economy and corporate profits had given rise to an intense war

for talent. Smart people were hard to find, harder to keep. Companies tried ever newer ways to reward the best
among their staff. But their most effective tool ² a golden handcuff, if you will ² has been the employee stock
option plan (ESOP).

Over the last decade, employee ownership has spread. For the employee, it was the quickest route to the
millionaire club. For the employer, it was the trump card of staff motivation with little burnout of cash. But after two
tumultuous years that has seen the stock market plunge and recover ² both in record time ² ESOPs are at a
crossroads.

Our special report on ESOPs throws light on these changes. We tell you
how India Inc. is evolving employee ownership schemes through these
tough times. The first round during the boom period was marked by too
much optimism, the second round now by too much pessimism. But
hopefully, ESOPs will enter the age of realism and emerge a stronger
compensation tool.

Based on an analysis of listed companies and their ESOP plans, the

package reveals corporate India¶s journey so far ² the early adopters, big
users and the lessons they have learnt. How do they choose the
employees to cover and what is the motive? What are some of the most
Ê

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defining features of plans being offered in India? How can the government
 
 
affect the gains from ESOP? And most importantly, how can you, as a
smart executive, play the game well and make the most of your stock
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Ê We, at 0  x , worked closely with ESOP Direct, a specialist
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The stories listed below are all parts of our special repor

Read more: http://business.in.com/article/esop/esops -

fables/6482/1#ixzz153cO6Wm4

Î arayana Murthy¶s chauffeur and personal assistant know the value of

an employee stock option. The employees of the Infosys¶ founder-CEO
were part of the over 2,000 employees who received ESOPs from the
company that turned them into overnight millionaires when the company¶s
shares were quoting at Rs. 7,500 in the early 2000s.

It¶s every company¶s dream to create that kind of wealth for its best
employees. But today, a big gulf has opened between intention and reality.
Stock options are less attractive to employees and cumbersome for
employers thanks to one joker in the pack ² tax. First, the fringe benefit
tax (FBT) which was slapped on employee stock options in 2007, created a
controversial and formidable hurdle to wealth creation from ESOPs. The
FBT was scrapped this year. Now, ESOPs will be taxed as perquisites in
the hands of employees.

Why is perquisite tax on ESOPs a problem?

Because perquisite tax is calculated on
difference between the market price of the
stock on the date of exercise and the
exercise price. So in a rising market, your
tax liability will increase when you exercise
your stock option independent of what the
price was on the vesting date.

But not everyone sees the move as a bad

thing. Nikhil Bhatia, executive director,
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WATCH THE POINT: "The Pound of
flesh, which I demand of him, is dearly
Pricewaterhouse Coopers, India says, ³It¶s
bought; 'tis mine and I will have it."- The true that perquisite tax will be more in a
Merchant of Venice
rising market, but anywhere you make a
gain, your taxes will always go up. If you receive an increment in your
salary ² does it mean it¶s a harsh move on employees because your taxes
go up?´

Paying more tax is not the only concern. The practical implementation of
the new provisions leaves much to be desired. For instance, it is unclear
whether new rules will be prescribed for valuing ESOPs or if the valuation
rules will be identical to those under the FBT regime.

NRI employees¶ cases are also confusing. FBT was not applicable because
they lived outside India. Similarly, in case of Indian employees where FBT
was deducted and paid since April 09, companies will have to re -work the
perquisite value, calculate the difference with respect to FBT and recover
the shortfall or refund excess to the employees. Add to this the
complication of working out advance FBT already paid by co mpanies in
relation to shares allotted after April 09. Do they refund this amount or
adjust it against their corporate tax liability?
According to Bhatia, the government needs to view a company¶s ESOP as
part of a compensation strategy. ³Today, with FBT and the market as it is,
an employee is just going to say µBoss, I want less ESOP and more cash¶.
And if the company doesn¶t comply, ano ther employer offering a better deal
means you¶ve just lost an employee.´

Read more: http://business.in.com/article/esop/a -sop-

story/6502/1#ixzz153dWXhUt

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

w 45


: 6IT & ITES sectors are the leaders, but growth and hunger for talent are driving
adoption in other sectors. The reasons vary ² for engineering services fi rms it is retention at the top; for banks,
to woo talent despite lower salary; new sectors like aviation use it to attract talent from other sectors

,

%
Companies are offering ESOPs selectively with two out of three firms restricting it to only top quarter of the staff.
Banks and financial firms buck the trend and have wider coverage Often, companies begin with a broad based
ESOP plan but steadily become more selective: Equity is not an instrument that everybody understands. Many
young people prefer cash in hand



As many as 58 percent of Indian companies prefer to
grant ESOPs at the current market price (thus escaping
accounting charge and FBT) rather than at a discount.
Companies who give out discounted ESOPs do so to
reward past performance. Also, discounted options are
mostly a one-time grant and given out in the early days of
the scheme

/

Ê

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% ESOPs in India typically have three to five years of

Data presented here was gathered through a survey vesting period. Rare though, sometimes companies do
conducted by ESOP Direct
offer one year vesting which is the minimum period
allowed when retention is not the sole objective of ESOPs (rewarding past performance could be one of the
reasons). Bullet vesting ² or vesting in one go ² is rare

/%
Initially, ESOPs in India were largely time-based with companies focusing on employee retention. Slowly, ESOPs
are being used to drive performance. A majority of companies (85 percent) who have performance-linked ESOPs
implemented it after 2006. Half of all pharma, FMCG and construction and infrastructure firms are linking their
ESOPs to performance. In the IT sector, it stood at 42 percent and in the media at 25 perce
 Read more: http://business.in.com/article/esop/esops -are-more-complex-
than-they-seem-but-are-here-to-stay/6532/1#ixzz153eJuu30

!!-





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NEW DELHI: The three months leading to December 2009 saw the stock markets gaining back some
of their lost glory. The quarter also witnessed more than a dozen top executives of India Inc
encashing on their hard-earned shares allotted under the employee stock options (Esop).

Among the top executives are two CEOs with diversified business interests. AM Naik, chief of
engineering and construction major L&T, sold shares worth Rs 7.65 crore, while diversified consumer
goods maker ITC¶s CEO YC Deveshwar pocketed around Rs 1.29 crore. Others who pocketed over a
crore last quarter include executive director of Kotak Mahindra Bank C Jayaram; ICICI Bank¶s
executive director and HR head K Ramkumar; MB Chinappa, president (finance) of Syngene
International, a subsidiary of Biocon , Dabur¶s executive director (HR) Ambati Sudhakar; and VK
Kaushik who sold shares weeks before resigning as Punj Lloyd MD.

Some of these CXOs have sold shares from their Esop basket throughout the year, so the value of
shares sold in the whole of 2009 would work out to be much more. Moreover, most of them have only
sold a part of what they own, so they are sitting on huge Esop-based wealth, that is multiple times
their annual compensation. For instance, L&T¶s Mr Naik, who had total annual remuneration of Rs
12.5 crore for the year ended March 2009, is estimated to have sold shares worth over Rs 30 crore
since June. His remaining shares in the company is worth more than Rs 335 crore.
L&T also has a number of board members who own shares that make them multi-millionaires,
including finance head YM Deosthalee who owns L&T shares worth Rs 192 crore, and president of
construction business KV Rangaswami whose current shareholding is worth around Rs 30 crore.

³Over the past few years, stock options have become a very significant portion of a top executive¶s
compensation. In certain cases, it may even go upto two to three times his annual cost to company,´
says Tarun Gulati, founder & CEO, Just Esops, a consultancy firm.Mr Gulati feels that this is quite
logical since people at the top are in a position to take strategic decisions, so their compensations
should also be significantly linked to the overall value creation.

Some firms such as Oracle Financial (formerly i-Flex), Dabur, HDFC Bank , ICICI Bank , to name a
few, had multiple executives selling shares worth over a crore. For instance, in Oracle Financial
Services, V Shankar, Joseph John, Makarand Padalkar pocketed more than a crore each last
quarter.

Saumen Chakraborty, who is president ² corporate and global generics operations at Dr Reddy¶s
Laboratories, also sold shares worth Rs 94 lakh in the last quarter. Mr Chakraborty said that he
exercised the option to buy some property for himself. ³I still hold around 20,000 shares as Esops and
another 30,000 shares of the company in my demat account,´ he said.

Besides these top corporate executives, many independent directors also pocketed a huge sum by
offloading shares allotted to them under stock option plans. For instance, Infosys¶ Marti Subramanian
sold shares worth Rs 1.79 crore last quarter, HCL Tech¶s Robin Abrams pocketed Rs 1.09 crore,
while Biocon¶s Neville Bain and Charles Cooney encashed Rs 4.8 crore and Rs 1.49 crore,
respectively.

Says R Suresh, MD of executive search firm Stanton Chase, ³Companies in India started giving stock
options to independent directors in the last few years, something that was earlier considered as a
western phenomenon. This is because of the contribution that such directors make to the long-term
strategy and growth of businesses.´

He adds that being an independent director is no longer about making a few appearances in meetings
and getting paid accordingly, many such directors are well-prepared to question the decisions of the
board, which they think may not be suitable for the company: ³Moreover, if independent directors are
expected to take the flak in the event of some abnormalities, they might as well be rewarded for doing
good for the company.´ Ofcourse, there are many other top corporate executives who hold shares or
stock options of their companies worth more than Rs 50 crore each, including a few in financial
services firm such as India Infoline , besides Cairn India¶s Rahul Dhir.
Ê

º
 
 
  

February 19th, 2010admin

Leave a commentGo to comments

Many companies use Employee Stock Options Plan (ESOP) to compensate, retain and attract
employees. These plans give employees the right to buy specific number of shares of the
company at a fixed price within a certain period of time. Employees hope to profit by selling the
shares at a higher price than the price at which it was granted to them.

During falling equity markets between 2008-09 many employees allowed their Stock Options to
lapse as they feared that the market price at a later date could fall below the option price.
However, in rising equity markets since mid 2009, the ESOP has come back into vogue in a big
way.

Earlier ESOP gains, which attracted Fringe Benefit Tax, were paid by the companies (recoverable
from employees). Now (from 01.04.2009) ESOP gains are taxable on the gains made by the
employee. In general capital gains taxes are calculated based on three factors. Buy & Sell Date,
Buy & Sell price and holding period. To know more on how capital gains are taxed in India visit
here. In case of ESOP, cost price & Buy Date are determined in a slightly different method.

Let us now see how the ESOP gains are presently taxed under Indian Income Tax Act. Before
getting into this let¶s understand some key terms that are used in capital gains for ESOP.
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Let¶s see how Vivek¶s (working for XYZ Company) earnings from ESOP are taxed.

` Vivek has been granted 500 Stock options by his employer in July 2008
` Allotted price of Rs.100 per share (exercise price)
` Vivek exercised (redeemed) entire stock options in July 2009
` The share price was Rs.250 on the day of redemption (Fair market value).
` He later sold the entire shares in the stock exchange in January 2010
` @ Sale price of Rs.450 per share.

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1 In case if Vivek holds the shares for more than 12 months from the date of exercise, it will be a
long term capital asset and the capital gains will be fully exempt from tax. He doesn¶t have to pay
the Rs.15,450 shown in #7 above.

2 Assumed for highest tax slab and employer is listed company

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 º
 


Theory E: Based on Economic value
Theory O: Based on Organizational capability
î  
Main focus is on shareholder value involves:-
Economic incentives
Drastic layoffs, Downsizing, Restructuring
î  
Develop corporate culture & human capability through individual & organizational learning
Process of changing, obtaining feedback, reflecting & making further changes
Typically have strong, long-held, commitment-based contracts with their employees
!"
Leadership
‡ E: Top-down approach with little involvement from managers/lower-levels
‡ O: Get all employees emotionally committed & focus on bottom-up
Focus
‡ E: Streamlining ³hardware´ ± structures & systems
‡ O: Building up ³Software´ ± culture, behavior & attitude of employees
Process
‡ E: Viewpoint held that battle requires clear, comprehensive, common plan of action with specific
deadlines
‡ O: Changes and more evolutionary & emergent; Using innovative work processes, values &
culture changes adopted from one dpmt/plant to another
Reward System
‡ E: Primarily financial $$$
‡ O: Compensation supports goal of culture change & but does NOT drive these goals; E.g. Skills-
based pay system, Profit-sharing plans
Consultants
‡ E: Rely heavily on external consultants ± E.g. To identify many painful cost-cutting initiatives
‡ O: Rely far less on consultants ± E.g. To help managers & workers analyze their own solutions

Note: Click for larger view

 
To build a company that can adapt, survive & prosper over the years, both E & O strategies must
be combined
CAUTION: Mixing E & O techniques can destabilize the company
E.g. FEW exceptions like Jack Welsh, GE¶s CEO by imposing E-type restructuring demanding all GE
businesses be 1st or 2nd in their industry, else sold off
After laying off > 100k employees, switch to O strategy by initiative to change GE culture to be
boundary-less with open feedback & communication
Note: Also very difficult to implement O before E as employees will distrust the company


#  
Focus on both Hard (Economic value) + Soft (Transforming culture) ± E.g. Freeze pay-rises; Less
hierarchy & more transparency
Plan for Spontaneity to allow real experimentation without penalizing for failures ± E.g. Actively
promote new ideas/testing to drive innovation
Incentive to reinforce but NOT drive change: To apply Theory E incentives in an O way ± E.g. Pay
to reward commitment (stock options) & employees pay based on corporate & personal
performance
Consultants as Expert Resources to Empower: To provide specialized knowledge & technical skills
company lacking especially in early stages of change
$"
 
Are you in a Theory E or Theory O company? Which works better?
(Also are these µRat Race¶ posts interesting to you guys? )
Ê

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4 
By Christine Harper - Jun 16, 2010 9:30 AM GMT+0530

`
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