The Hindu : SEBI panel for revised ESOP definition

Online edition of India's National Newspaper
Wednesday, Nov 27, 2002

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SEBI panel for revised ESOP definition

MUMBAI NOV. 26. A Securities and Exchange Board of India's committee on employee stock options (ESOPs) has recommended that SEBI should incorporate the definition of ESOPs in its guidelines as mentioned in Companies Act, 1956, revise the definition of fair value of stock option and disclose impact on profit and earnings per share (EPS).

The stipulated lock-in period of one year should not be applicable to stock options granted to employees before the initial public offering (IPO), the committee headed by former member J. R. Varma said in the report here.

According to Companies Act, ESOP was an option given to director/employee, which gives them benefit or a right to purchase or subscribe securities of the company at a future date and at predetermined price. This definition should be incorporated by SEBI in its norms, the panel said. The existing guidelines of 1999 should not be made applicable to ESOPs granted prior to June 19, 1999, it added.

Recommending a revision in definition of fair value of stock options, the panel said the value was the price that would be obtained in an arms length transaction between a willing buyer and seller.

The value should be estimated by using option pricing model, which factors in current market price of underlying stock and expected volatility. It should also take into account the exercise price and expected life of options, the report said.

The company should disclose the fair value of ESOP and explain its impact on the profit and EPS, if the entity had expensed the ESOPs on fair value basis, the Varma panel said.

The committee said the compensation committee of the company's board should adjust the price and number of ESOPs to maintain the value of stock option when the bonus/rights issue or a merger was announced. Whereever the corporates have created a trust to administer ESOPs, the entity should be consolidated with the company and SEBI guidelines should be applied to it, the panel said.

The proposal to issue options should be ratified by the shareholders and provision should be made to get prior approval from stock exchanges to avoid delay in listing ESOPs, as and when they are issued.

The ESOPs with graded vesting period should be recognised as several separate ESOPs and be treated in accounts accordingly, the report said adding that SEBI must mandate minimum set of disclosures by the company to whom options are granted with a view to protecting their rights as investors. — PTI

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