In a bid to address the concern that issue of stock options to independent directors might be causing conflict of interest and casting a cloud over their independence, the new Companies Act is set to end this practice. The new Bill, approved in the Lok Sabha and likely to be cleared by the Rajya Sabha early next year, categorically says an independent director will not be entitled to stock options.
The move is likely to have a significant impact as filings show that several large companies have granted stock options to their independent directors (IDs) on a regular basis and many IDs hold hundreds of thousands of shares in their respective companies. Among some prominent companies to have done so are ITC, L&T, M&M, Dr Reddy’s and HDFC.
Primedatabase Chairman and Managing Director Prithivi Haldea says the changes in the new Bill are in line with global practices. “We are following what is already law in most Western countries such as the UK. This eliminates the possibility of any conflict of interest.”
| BENEFITS SET TO BE CURTAILED Stock options granted to independent directors | ||
| Company | Total number of options granted to IDs | Promoter holding |
| ITC* | 50,000 | Nil |
| Larsen & Toubro | 60,000 | Nil |
| Dr Reddy’s | 16,800 | 25.56% |
| HDFC# | 200,000 | Nil |
| M&M# | 175,000 | 25.35% |
| *Options granted in FY12; #Options granted and exercised since 2001; Source: Corporate governance reports of companies, BSE | ||
A Business Standard analysis of corporate governance reports of Sensex-30 companies shows at least five of these companies have granted stock options to their independent directors in significant numbers. Companies are required to file corporate governance reports detailing their various board committees, remuneration paid to directors, etc, as part of their annual reports.
The practice is more visible in companies with low promoter holding or those that do not have an identifiable promoter or promoter group, the analysis shows. Of the five companies, M&M and Dr Reddy’s have promoter holdings of just over 25 per cent, while the rest do not have any identifiable promoter group and institutions hold majority.
For the financial year ended March 2012, ITC issued 10,000 stock options each to five of its IDs. By Friday’s closing share price of Rs 287.80 apiece , these options would be worth Rs 14.4 lakh. These five directors are A Baijal, S H Khan, S B Mathur, P B Ramanujam and B Vijayaraghavan. Of these, Baijal now holds 45,000 ITC shares, while Mathur (161,000) Khan (190,000) and Ramanujam (129,500) own more.
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The Securities and Exchange Board of India (Sebi) rules cap the permissible holding of an independent director in a company at two per cent. The annual report of L&T, another company with no strong promoter group, says its non-executive director S Rajgopal “has been granted 60,000 stock options, but not yet exercised”. Rajgopal held 900 shares apart from these options as on March 31, it says. According to L&T’s corporate governance report, “all our NEDs (non-executive directors) qualify as independent directors.”
Other major companies that have issued stock options to independent directors in the recent past include M&M. According to the annexure to its directors report for 2011-12, seven of its IDs received 20,000 stock options each in 2001 and 5,000 each in 2005. The directors who got these options are Nadir Godrej, M M Murugappan, N Vaghul, A S Ganguly, R K Kulkarni, Anupam Puri and Deepak Parekh. Most of the options have been exercised, the filings show.
HDFC, which Parekh heads, has also issued options to its independent directors in significant numbers. The recipients are Keshub Mahindra, Shirish B Patel, B S Mehta, D M Sukthankar, D N Ghosh, S A Dave, Ram S Tarneja, N M Munjee and D M Satwalekar. HDFC issued 10,000 options each in 2007-08 and 2008-09. Shareholdings of IDs varies from 8,830 shares held by N M Munjee to 213,960 by Satwalekar, the latest filing shows.
Under the Companies Act, 1956, there is no express bar on the grant of stock options. Sebi’s Employee stock option plan guidelines also say all employees and directors are eligible, except: a) employees/directors who are promoters or belong to the promoter group; or b) directors who directly or indirectly hold more than 10 per cent of outstanding shares of a firm. These guidelines also define an ID as a director who is not in whole-time employment with a firm and who is neither a promoter nor belongs to the promoter group.