Independent directors fight back on Esops

Financial institutions are facing a Herculean task in convincing their nominee directors not to exercise the employee stock options (Esops) granted to them, as neither the stock option guidelines of the Securities and Exchange Board of India nor the directors' appointment letters are clear on the Esops granted to them from their respective companies.

Defiant nominee directors said the Sebi guidelines did not stipulate that nominee directors of FIs cannot accept stock options. And when the directors have been allotted the options, they are not under any legal agreement to sell them back or give them free to the institutions. "They have paid hard cash to buy these options from the company... they are under no compulsion either to sell them back to the FIs or give them free," said sources close to the nominee directors of Larsen and Toubro.

In April, General Insurance Corporation and Life Insurance Corporation "" which hold close to 26 per cent stake in L&T"" wrote to their nominee directors on the L&T board, BP Deshmukh and Kranti Sinha, asking them not to exercise the stock options. This has opened a legal can of worms as nominee directors represent the institutions and sit on the boards of various companies as independent directors and have received shares at discounted rates.

Both Deshmukh and Sinha, who now hold 30,000 and 20,000 L&T shares respectively, decided to exercise the options granted to them early this year and the shares are now transferred in their name. This led to the FIs objecting strongly against the move, prompting them to write to L&T and the directors asking them to explain how the options were granted.

Interestingly, L&T's nominations and compensation committee is chaired by another FI (Unit Trust of India)-nominated 'independent' director, S Rajgopal, who holds 15,000 options. Rajgopal has not exercised his options as yet. In the annual shareholders' meeting held on August 25, 2006, the board proposed that independent directors should be offered 120,000 options per annum with aggregate options not exceeding 600,000.

One of the nominee-directors said according to Section 4.3 of the Esop guidelines, 1999 drafted by Sebi, a director who either by himself or through his relative or through any body corporate, directly or indirectly holds more than 10 per cent of the outstanding equity shares of the company will not be eligible to participate in the Esops. "In this case, none of the directors owns 10 per cent shares in L&T or through any body corporate (LIC). Thus, this guideline does not apply to them, " he said.

Corporate lawyers say Sebi must clarify this before the issue lands up in the courts. "It all depends on the agreement signed between the FIs and their nominees," said Mumbai corporate lawyer, Y K Trivedi.

To this, the directors said as there is no agreement between the FIs and the directors, they are free to exercise the options. "The appointment letter to the nominee director is silent on Esops. It only talks about sitting fees and commission. In fact, by repatriating the nominee directors' commission on profits to the FIs, aren't the minority shareholders being discriminated against?" he asked.

Directors said exercising the options is now "left to interpretation" and they don't mind if the institutions replace them with new directors. "This is a grey area and the Sebi should clarify this issue before any of the parties move the courts," Trivedi said.