Proxy firms lock horns over Crisil Esops

IiAS says low exercise price of amended scheme a drag on profits; SES says better than diluting holdings

A proposal to revise the exercise price of employee stock option plan (Esop) by rating major Crisil has evoked conflicting reactions from proxy advisory firms.

The rater has moved a resolution to amend the Esop scheme in the upcoming annual general meeting scheduled on April 20. It has proposed to revise the exercise price of 1.62 million un-granted options of the Company ESOP Scheme (ESOS-2014) from “market price per share” to “either face value or market price per share”. The rationale given for the move was that the current stock option pool may not be adequate given the exercise price considering the number of employees and the rate of growth in this number.

Institutional Investor Advisory Services (IiAS) has opposed this scheme on the grounds that the low exercise price would put a significant burden on the company’s resources and would be unfair to shareholders. It has advised shareholders to vote against the resolution.

Explaining its move, IiAS said the move a “deterioration from the company’s earlier practice” of issuing stock options at market price. “The stated rationale for the change is that the scheme does not have sufficient options available to support the needs of the company’s large talent pool. We believe the company could con- sider launching a new scheme (options at market price) commensurate with the size of its talent pool.”

According to IiAS, “Issuing stock options at face value immediately rewards employees, without any need for value creation: CRISIL’s stock price has underperformed the relevant indices over the past one year — if the market has not valued the company’s growth, then employees (as shareholders do) must equally bear the burden.” At the current market price of ~1,914 per share and exercise price of ~1 per share (face value), the total cost to the company will be ~300 crore. Assuming that the cost is amortised over five years, the company will spend ~60 crore. “At annual cost aggregating over 18 per cent of (2016) profits, the cost is high,” IiAS concluded.

In response to an email seeking response on the adverse comments, Crisil referred to the report by Stakeholders Empowerment Services (SES), which has advised shareholders to vote for the resolution citing a price revision is better than issuing more shares, which could dilute the shareholding of other investors.

The Crisil spokesperson said in an email response, “CRISIL intends to continue implementing the CRISIL Employee Stock Option Scheme 2014 with a view to attract and retain key talent by way of rewarding their performance and to motivate them to contribute to the overall corporate growth and profitability. The change in terms of revising the exercise price is proposed towards ensuring the current pool of ESOPs are used more effectively, most likely over a period of time.”

Under the Indian Accounting Standards, the company would follow the fair value method for valuation of options for the current ESOPs granted as well as any new ESOPs which might be granted, the spokesperson added.

IiAS has opposed this scheme on the grounds that the low exercise price would put a significant burden on the company's resources and would be unfair to shareholders