The financial media in India, has more often than not chosen to use the terms-employee stock options (ESO) and ESOP, interchangeably. However, as pointed out by Rajendra Chitale--a CA--in a paper presented at the BCA golden jubilee conference, ESOP stands for employee share ownership plans, a concept radically different from employee stock options in origin, objective and structure. Thus, it is prudent to understand what the terms mean.

Employee stock options are basically a tool for compensating managers, with reference to the appreciation in the stock price of the employer company, between the date of award or grant of the stock options and the date on which the stock options vest (called vesting date), as per the vesting schedule. Once the stock options vest, they may be exercised any time thereafter till the expiration date. The vesting of options could be conditional and linked to specified targets of performance by the firm. A stock option gives the right, but not the obligationto buy a certain number of shares in the company at a fixed price for a certain number of years. The price at which option is provided is called the "grant" price and is usually the market price at the time of granting the options. The option is valueless and therefore lapses, if the stock price of the firm between vesting date and the expiration date is less than or equal to its grant price.

Employee share ownership plans-under this scheme an employee is converted into a shareholder through tax deductible contributions made by the company to an ESOP trust, which holds the shares for the benefit of the employees. Thus, ESOPs are basically tax driven tools of corporate finance in USA, where the employer establishes tax-exempt ESOP trusts to acquire a stake in the company. The trusts are either funded by the employer through tax-deductible contributions or the ESOP trust borrows commercially. The borrowings are guaranteed by the employer company to acquire company securities. Such ESOPs are leveraged ESOPs.The employer can make a tax deductible contribution of upto 25 per cent of payroll to the trust, which uses it to repay the loans. However the ceiling of 25 per cent can be exceeded (and will be tax deductible), if the trust uses the funds to repay the ESOP loans. Importantly, 50 per cent of the interest earned by banks and other lending institutions by lending to ESOPs is exempt from tax. Tax deductions are also allowed for dividends paid on employer stock held in ESOP. An individual selling employer stock to ESOP may be able to defer recognition of any gain realised on the sale, if the sale proceeds are invested in securities of other corporations.

In India, companies will be allowed to issue equity shares (in accordance with guidelines to be framed by Sebi) to a class(es) of director(S) or employees, presumably at a discount to market price. Sec 79A was not required at all. All that was required was exempting ESOPs from the pricing formula for preferential issues. Mixing the provisions of new Sec 79Awith provisions of Sec 77 of Companies Act, it should be possible to fund an ESOP trust through an interest free loan from the employer firm. But for this to happen, Sec 40A(9), (10), (11) of the I-T Act, 1961 which states that no deduction shall be allowed for computing taxable profits, in respect of any sum paid by an assessee as an employer towards the setting up or formation of, or as any contribution to, any fund or trust, firm, AoPs, society or other institution for any purpose, except where such sum is paid or contributed (within the prescribed limits) to a recognised provident fund or an approved gratuity fund or an approved superannuation fund or for the purposes and to the extent required by or under any other law. In Tisco Vs IAC (1994) 77 Taxman 93 (Bom.)(Mag.), it was held by the tribunal, that if an expense incurred by an assesee is not in the nature of employer, Sec 40A(9) does not apply.

Petroproduct prices

In a recent statement, the petroleum minister ruled out the possibility ofany changes in the phased dismantling of the administered pricing mechanism (APM). However in the same breath, he also ruled out any possibility of reducing the subsidy on kerosene -- the `poor man's fuel'. Interestingly though, there was a hint at lowering the subsidy on LPG. But, are these not all contradictory statements? A phased dismantling of the APM means that prices would have to be aligned to international parity levels in a phased manner. Thus if prices are not increased periodically, there will be a time when a huge hike in prices would be required. However, this increment is likely to be undertaken when the next government is in place, which is probably the reason for the BJP government shying away from decision making. Interestingly petroproduct prices were expected to be higher in winter, but with this increase not materialising, prices post-winter could slip even further. This would then be an excellent opportunity for the government to align the prices as close to international prices aspossible without any major effect on the oil pool account. Further, there is increased evidence that kerosene is being used for adulteration in diesel. Reflected in the fact that though diesel demand has not increased as per expectation, kerosene imports have. Diesel prices, it may be noted have been brought under import parity levels. Thus in order to stop the adulteration problem, kerosene prices would also have to be realigned, bringing the differential between diesel and kerosene, to more realistic levels.

Thus, the only decision that makes sense is the reduction in LPG subsidy which would undoubtedly be objected to by the opposition. Thus once again, with the minister delaying decision-making on political grounds, another golden chance to align prices is being lost.

Emcee (With contributions from Shishir Asthana)