Lack of clear structure to hinder banks' fundraising plans via ESOPs

Uncertainty over staff participation, lack of clear structure key obstacles

The plans of public sector banks to tap their employee base to raise capital through employee stock purchase schemes (ESPS) are likely to be a non-starter owing to uncertainty over staff participation and lack of clarity on structure of the offer. Moreover, analysts are of opinion that the amount of capital planned to be raised by banks is way less than their overall requirement, making this route ineffective.

In March last year, the government allowed PSBs to offer stock options to their employees. The move was aimed at retaining experienced hands as well as attracting top talent from the private sector, besides using it as a means of raising capital.

“I think there should be clarity over the structure of the offer like whether an ESOP trust for employees will be formed to hold on all the shares, and who will fund this trust. So, we have to see the nitty-gritty of the structure,” said Karthik Srinivasan, group head of financial sector ratings at ICRA. 

“The amount of capital raised through this route is meagre as compared to the capital requirement of these banks,” he added.

According to an ICRA report, PSBs will require capital of Rs 1,200-1500 billion in 2018-19 if they are to meet regulatory capital ratios, including capital conservation buffers.

In the last one year, a host of public sector lenders like Allahabad Bank, United Bank and more recently Punjab National Bank and Canara Bank have come up with plans to issue ESOPs to employees and raise money through the employee stock purchase route.

The first issue was announced in January this year by Allahabad Bank in which 50 million shares were issued to employees at 25 per cent discount to market price. The issue witnessed 87 per cent subscription from staff and the bank was able to raise Rs 2.36 billion against its target of Rs 2.70 billion from this issue. 

However, there were allegations that employees were coerced by the management to participate in the issue despite opposition from the staff union. Since then, bank unions have started vehemently opposing any such offer as they see it as a way to dilute government stake.

“Fundamentally, we are opposed to issuance of ESOPs to employees as this is a route through which the government is trying to dilute its stake. We will advise our staff not to participate in such issues,” said M D Gopinath, president of the Canara Bank Officers’ Union. “As employees will not hold on to their shares and sell it once they see upside in the stock, this idea of employee equity seems like a route for bank privatisation,” he added.

Canara Bank said last month it would issue up to 60 million equity shares to its staff to raise up to Rs 10 billion under ESPS. Similarly, the PNB board approved a resolution allowing issuance of 100 million new shares in one or more tranches to its employees.

Udit Kariwala, associate director at India Ratings and Research, said that as upside to PSB stocks seemed to be limited at this time, employees might not be too enthused to participate. 

“Given the capital requirement of PSBs, funds raised through ESPS will be way short of the demand. So, we should not be unnecessarily concerned about the dilution of stake through this route. Rather, ESOPs should be used judiciously to incentivise performers in PSBs,” he added.

Problem areas

• Amount of capital planned to be raised by banks is way less than their overall requirement for this financial year
• Bank unions are opposing the move as they see it as a step to dilute government stake
• Lack of clarity over the structure of ESOP issuance is another concern
• There were allegations that employees were coerced by the management to participate in the issue in the case of one of the banks