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Companies in India, which had introduced employee stock plans and their variants during the period ‘94 till ‘99, had to innovate mechanisms for establishing them under fairly inhospitable legislative structures. In strict terms most of them cannot be called “option” plans because there are no options as such being given by the company, as the law did not facilitate the same. Consequently, these plans were ushered in through an intermediary trust and offered shares or warrants with a service lock-in mechanism. These plans have been called as:

• Equity Scheme,
• Offer Plans,
• Stock Participation Plans and the like

 

There have also been some instances of stock appreciation rights, shadow stock, or phantom stock being given, particularly where the company is listed in stock exchanges abroad and had to offer an incentive to local executives.

 

What are the shortcomings of these plans?

 

These plans in India, so far, have not issued stock options per se but shares, warrants or mere authorizations / promissory notes. Most such plans have also been restricted to a few employees, do not offer any tax advantages to any of the parties nor do they have leveraging possibilities.

They are relatively short term in focus with 3 -10 years as the frame and do not have any link with savings or retirement benefits - save the case of a Public Enterprise which has been operating a mutual benefit plan.

For discussion purposes, considering the schemes in vogue, stock plans may be fitted into a typology as follows:

• Options,
• Shares,
• Warrants.

 

One - off, Uniform: This will be an offer plan and decisions may be made whether the company would exclude non-performers, trainees and those with little service. Other than that it would be a one-time allotment of equal number of shares or warrants to all at the market value. The new SEBI guidelines in respect of Employee Stock Purchase Plans permit allotment of options below the market price for the shares, subject to accounting for the differential, in the books of the company.

 

One – off, Differential / Discretionary: While the earlier one can be administered easily, this version has some sensitive decision points. This also would be a one-off scheme but may differentiate allotments by grades, seniority or market value for special skills. If other factors like achievements, potential, loyalty, hard work and contribution to corporate performance are also considered, the discretionary element would go up commensurately.

 

On – Going Schemes: These serve multiple objectives. They can use a combination of uniform, differential and discretionary allotments dynamically. They may be warrants or shares and can be issued as a “sign-on” bonus, on confirmation, on promotion, on superannuating, on recognition of outstanding contribution, as performance pay, in lieu of compensation and other such conditions. Such award may be to some or all individuals. These types would have a combination of objectives in mind and hence are structured to enable flexibility. A special purpose vehicle like the Trust becomes preferable in such situations for many reasons.

 

Proxy Shares/Stock – appreciation Rights / Phantom Shares.

 

These are notional units apportioned to employees and are best described as productivity/contribution linked incentive programs than a stock option plan.

Typically, an employee is allotted notional units / shares of the company based on certain criteria at a set price.  The employee will be required to exercise his/her option within a given period, say two years.

The employee may exercise the option when the share price goes up fairly high and will be eligible to draw the differential or the whole in cash (as per the design), on deduction of tax. It is reported that some MNCs have been using this in India.

Also, if in a regular stock option plan, a provision is made to enable the employee to decline the shares and opt for the cash differential between cost of exercise and market price, it would have the effect of a stock appreciation rights / phantom share.