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IMPORTANCE OF

ETHICS IN BUSINESS

Source:

1.ICMR,Chapter2

2.Velaquez ,M.G. Business Ethics,Chapter2

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ESOs are slightly different fromregular options, because they don'thave puts and you typically must waita specified period before you areallowed to exercise the option.

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All employees and directors are eligible, except

those already holding 10 per cent of equity.

Shareholders' permission must be taken afterproviding them with complete details.

A minimum lock-in period of 1 year from the date

of grant will be applicable.

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Companies are free to determine the exercise-

price of the stock options they offer.

If the exercise-price is at a discount to themarket price, the discount will be treated asa cost Shareholders' permission must be

taken after providing them.

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1. Employee stock options are no longerreserved for the executive suites

2. ESOs are still popular, even after thedot-com crash.

3. Stock options can be expensive toexercise.

4. . You'll see these common terms .EXCERISE

STRIKE PRICE5. There are two common types of plans

10 IMPT THING

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6. Nonqualified plans are special

7. There are three main ways to exercise

options8. It's usually smart to hold options as long

as you can.

9. There may be compelling reasons toexercise early

10. Tax consequences can be tricky

10 IMPT THING(cont)

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Granting options to employees wasviewed as a good thing because it

(theoretically) aligned the interests ofthe employees (normally the keyexecutives) with those of the commonshareholders.

The Good

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Executives continued to focus primarily onquarterly performance rather than on the

long term because they were allowed to sellthe stock after exercising the options.

Tax laws allowed managements to manageearnings by increasing the use of optionsinstead of cash wages.

The Bad

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Oversized rewards given by servileboards to ineffective executives

Repricing options rewardsunderperformers at the expense of thecommon shareholder

Increases in dilution risk as more andmore options are issued

The Ugly

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According to the Central Board of Direct Taxes

(CBDT), when an employer issues shares to itsemployees at less than the market price, theemployees have to pay a price on thedifference or perquisite value. When the issueprice is equal to the market price, theperquisite value is zero and no tax needs to be

paid.

TAXATION

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Deductibility of ESOP Contributions: Company can

deduct principal and interest payments it makes on loans

used to finance stock purchased by an ESOP. This isbecause the contribution to the ESOP is deductible and

the ESOP actually pays the principal and interest

The deductibility of contributions to an ESOP becomes

even more attractive in the case of a leveraged ESOP.Under this arrangement, an ESOP takes out a cash loanfrom a bank or other lender, with the borrowed fundsbeing paid to the sponsoring employer in exchange foremployer securities.

TAXATION

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Basic purpose- Employee retention.

Companies receive financing to purchase

property, new equipment, etc.Sense of ownership among employees.

Synergize the personal goals of the

employee with that of the organization.

Improving corporate performance, by

enabling employees to participate in thecreation and sharing of the wealth they help

create in an organization.

3

Why ESOP ?

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Potentially the most important reason:

Selling stock through an ESOP can defer

or permanently avoid taxation on any gainresulting from a sale.Owner diversifies assets whilemaintaining control.

ESOP buys out dissident shareholders.ESOP provides ownership succession forprivate companies.Merger & Acquisition financing strategy.

3

Why ESOP ? (contd.)

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Most ESOPs act out of a trust or through aboard of directors.

In the case of board of directors, there is adirect transfer of shares in the employee'sname from the company.

In the case of a trust, the company commits

itself to transferring a certain amount ofshares.

3

HOW DOES ESOP WORK

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In place of actual stock options, companies canalso offer phantom stock options, which conferstock appreciation rights.

Beneficiaries in such schemes receive a cashpayment equivalent to the rise in the values oftheir respective notional stocks without actualtransfer of shares in their names.

3

HOW DOES ESOP WORK

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Employees will take over

The trust owns the shares, not theindividual employee.

No share allocation until debt is repaid.

Selling shareholder can act as Trustee.

3

MISCONCEPTIONS

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Repurchase agreement / Put option

Shareholders or Company canrepurchase stock from employeesallowing control over degree in

ownership

3

MISCONCEPTIONS

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Companyis less attractive tothirdpartybuyers

Buyercanliquidate the ESOP.

Buyercanuse ESOP toretainkeyemployees.

Buyercanuse ESOP to finance acquisition.

3

MISCONCEPTIONS

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Which is the option involved in ESOP?

1 CALL OPTION2PUTOPTION

3PULL OPTION

4PUSHOPTION

Ans CALL OPTION

3

QUIZ

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VRS is a tool to downsize the employeestrength, Tool that helps in retaining

employee.?

1 sacking

2 golden handshake

3 ESOP

4 factor analysis

Ans ESOP

3

QUIZ