For a comprehensive Esops policy

Written by YRK Reddy | Updated: Mar 17 2007, 05:30am hrs
The recent uproar against fringe benefit tax (FBT) on stock options was indeed predictable. Even in the past, discussions on taxation of stock options did much hair-splitting over whether it would be taxable on offer, on vesting, on exercise or on sale; whether it should be income-tax or capital gains, or now whether it is indeed a fringe benefit at all; whether these will be taxed in the hands of the employee or borne by the company; if expatriates would be put to difficulty; and the method of determining fair market value if the shares are unlisted.

These ignore international developments and larger policy aspects. Many of the arguments that accompany such debates are specious. Here are three. First, the acronym Esops is being used wrongly to mean stock options. The world over, Esops stand for broadbased employee share ownership plans and are different from equity-linked incentive or retention plans for executives. Second, most countries offer no beneficial tax treatment to narrowly applied equity linked plansand yet, we prefer to treat the deserving and the self-serving types on par. Thirdly, the objective of attracting and retaining talent through stock options has not been validated satisfactorily.

The confusion is confounded, as there is no law on this in India. Equity-linked plans arrived formally in India around 1993-94, particularly with the issue of warrants on a preferential basis by Infosys and allotment of shares to specially created trusts for that purpose by a few other companies. These came along with new economy industries, which had devised legally sound ways in the absence of a facilitative law. It was only in 1999 that the stock exchange regulator came out with detailed schemes that permitted stock options and stock purchasesincluding the manner in which such awards at a concessional rate will be treated in accounts. The purpose is to incentivise better corporate governance through greater transparency and fair accounting. India has no public policy yet for promoting share ownership.

Many countries have looked upon employee share ownership plans (Esops) as different in their objectives and logic from other stock-related plans. Governments have propagated such ownership plans as a mechanism by which national/developmental objectives can be met. Thus, while US President Bush has propagated such plans to further the cause of an ownership society, Jeff Gates wrote about the ownership solution as the new way of promoting capitalism. In Britain, Esops are seen both as a social security measure and to further the cause of employee ownership. In Australia, the government has been promoting such broadbased plans to support the objectives of aligning the interests of employees and employers, and enhancing productivity, efficiency and participation.

The challenge for India is not to hair-split fringes and benefits, but to bring out a comprehensive public policy on broadbased share ownership
In the US as well as EU, there have been specific laws enacted for promoting share ownership amongst employees. The logic behind this is research proof that employee ownership enhances commitment, productivity and overall efficiency that may also reflect positively on both corporate and share performance indirectlyespecially where such ownership is supported by participatory styles.

Thus, the percentage of companies with employee share ownership is about 11% in the UK, 8% in Spain and 5% in Denmark. Further, the top 100 companies in Europe in terms of employee ownership-cap include Air France/KLM 14.7%, Logitech12.42%, ESSILOR 8.5%, Deutsche Bank 8%, Societe Generale 7.42%, UBS 6%, Saint Gobain 6%, Total 4%, Novartis 3.57%.

In almost all market economies, which believe in development of capital markets and higher participation of the immediate stakeholders in company ownership, Esops have been a key element of public policy. Tax breaks have mostly been finely structured to favour broadbased ownership plans with appropriate long-term structuring in tandem with social security measures.

Such policies did not dispense largesse. The challenge for India is not to hair-split fringes and benefits, but to bring out a comprehensive public policy on broadbased share ownership, making the appropriate distinctions.