How new-age Indian tech companies like Paytm have aligned with global counterparts to keep ESOPs out of EBITDA | The Financial Express

How new-age Indian tech companies like Paytm have aligned with global counterparts to keep ESOPs out of EBITDA

To buck the hurdles, a new trend is manifesting across India wherein noted new-age Indian tech companies, including Paytm and Zomato have reported adjusted EBITDA excluding ESOPs.

How new-age Indian tech companies like Paytm have aligned with global counterparts to keep ESOPs out of EBITDA
In a nutshell, ESOPS are share-based compensations given to employees and are accounted for as non-cash items.

While tech advancements have accelerated globally and in India, there’s a critical need to tweak Esop Costs. Some experts even opine that keeping Employee Stock Options (ESOPs) outside the purview of operating EBITDA is best. This is because factoring it while calculating operating EBITDA can skew numbers for a company’s overall financial report card, thereby impacting its performance, growth and profitability. This factor is already creating hurdles for new-age tech Indian companies getting listed on Dalal street.

To buck the hurdles, a new trend is manifesting across India wherein noted new-age Indian tech companies, including Paytm and Zomato have reported adjusted EBITDA excluding ESOPs. Incidentally, this practice matches other global tech giants like Airbnb, Grab, Uber, and others sharing their financials.

Unspooling ESOPs & the need for an independent space

In a nutshell, ESOPS are share-based compensations given to employees and are accounted for as non-cash items. Notably, the cost of ESOPs also dips with the passage of time. Since they don’t entail any cash outlay & the compensation is equivalent to the fair market value of the shares allotted to employees, ESOPs don’t really have a direct bearing on the overall operating performance of a company.

ESOPs are an accepted norm for technology giants worldwide to compensate their employees without hampering business growth. They can be repurchased from the employees when they leave the organisation.

A 2021 report by KPMG titled ‘ESOP Survey Report’ made some insightful observations about ESOPs and how Indian companies view them. The report stated the following on ESOPs:

•          The market pays the upside to its employees

•          There is no cash outflow for the company

•          Helps in retaining and attracting talent

•          Provides a sense of ownership to employees

•          Facilitates wealth creation for the employees.

While standard accounting norms call for ESOPs to be a part of operating EBITDA, measuring the company’s profit or loss on a non-cash item doesn’t hold solid, which is why ESOPs need to be kept out of EBIDTA.

Therefore, the operating metric that investors should track is the adjusted EBITDA, which enables them to accurately depict the scale of growth a company is achieving every quarter.

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First published on: 06-11-2022 at 23:17 IST