Market Regulator SEBI Allows Repricing Of ESOP, this is due to market conditions as Exercise Price Becomes Less Than Market Price making ESOP less attractive.
THE bloodbath in the stock market has forced some firms to restructure their employee stock option programmes (ESOP) to assuage employees who are seeing a large portion of their ‘wealth’ disappear. Thanks to the market correction early this year, a number of Esop schemes have become redundant or gone “underwater”. This means the current market price of the stock has fallen below the Esop exercise price.
This is true of most firms that issued Esops over the past one-and-half years when the markets were high and bullish. There are many firms which started Esops last year, particularly those which got listed in 2007. All firms who have a vesting period of one year would either have to reprice the options or see it as a worthless option at the hand of the employee which won’t be exercised.
Employees who got Esops before the market crash at the then prevailing market prices have seen a significant erosion in the value of their options. This places them on an inequitable ground compared to employees who are getting Esops priced at currently depressed share prices, as they would get to exercise their Esops at a lower price. Companies in such a situation are considering repricing of Esops issued earlier.
So far only a handful of firms have resorted to repricing though. DTH firm Dishtv, for example, last week approved a proposal to reprice the stock options at Rs 36.10, which have already been granted but not yet exercised. In August 2007, the firm had approved its Esop Scheme 2007, where it planned to grant 30.7 lakh options to 43 employees at a price of Rs 75.2 per share. In April this year it approved the grant of 1.84 lakh options at a price of Rs 63.95. However, the current price of Rs 39.05 makes all these options redundant.
Sometimes repricing may be required if the management feels that the options were granted at a time when the valuation was unrealistically high, in which case its more of a correction exercise.
He, however, warns that repricing is a double-edged sword. If done during usual market dips, it may signal insecurity and lack of confidence in the future growth trajectory on the part of the management, which can send out wrong signals to their people. It can create wrong expectations in the minds of the employee that the firm will continue to do so whenever the prices are not favourable. This defeats the very purpose of a stock option, which is intended to reward only if the market valuations are rewarding, and is not generally meant to be guaranteed profit.
Market regulator Sebi allows repricing of options if the exercise price becomes less than the market price. Of course, options are underwater not just in India. According to New York-based compensation consultancy Steven Hall & Partners, as of June end as much as 40.3% of Fortune 500 firms’ stock options were out of money by an average of 34.5%.
THE bloodbath in the stock market has forced some firms to restructure their employee stock option programmes (ESOP) to assuage employees who are seeing a large portion of their ‘wealth’ disappear. Thanks to the market correction early this year, a number of Esop schemes have become redundant or gone “underwater”. This means the current market price of the stock has fallen below the Esop exercise price.
This is true of most firms that issued Esops over the past one-and-half years when the markets were high and bullish. There are many firms which started Esops last year, particularly those which got listed in 2007. All firms who have a vesting period of one year would either have to reprice the options or see it as a worthless option at the hand of the employee which won’t be exercised.
Employees who got Esops before the market crash at the then prevailing market prices have seen a significant erosion in the value of their options. This places them on an inequitable ground compared to employees who are getting Esops priced at currently depressed share prices, as they would get to exercise their Esops at a lower price. Companies in such a situation are considering repricing of Esops issued earlier.
So far only a handful of firms have resorted to repricing though. DTH firm Dishtv, for example, last week approved a proposal to reprice the stock options at Rs 36.10, which have already been granted but not yet exercised. In August 2007, the firm had approved its Esop Scheme 2007, where it planned to grant 30.7 lakh options to 43 employees at a price of Rs 75.2 per share. In April this year it approved the grant of 1.84 lakh options at a price of Rs 63.95. However, the current price of Rs 39.05 makes all these options redundant.
Sometimes repricing may be required if the management feels that the options were granted at a time when the valuation was unrealistically high, in which case its more of a correction exercise.
He, however, warns that repricing is a double-edged sword. If done during usual market dips, it may signal insecurity and lack of confidence in the future growth trajectory on the part of the management, which can send out wrong signals to their people. It can create wrong expectations in the minds of the employee that the firm will continue to do so whenever the prices are not favourable. This defeats the very purpose of a stock option, which is intended to reward only if the market valuations are rewarding, and is not generally meant to be guaranteed profit.
Market regulator Sebi allows repricing of options if the exercise price becomes less than the market price. Of course, options are underwater not just in India. According to New York-based compensation consultancy Steven Hall & Partners, as of June end as much as 40.3% of Fortune 500 firms’ stock options were out of money by an average of 34.5%.
