IMPORTANCE OF

ETHICS IN BUSINESS

Source:
1.ICMR,Chapter2
2.Velaquez ,M.G. Business Ethics,Chapter2
ESOs are slightly different from regular
options, because they don't have puts and
you typically must wait a specified period
before you are allowed to exercise the
option.
 All employees and directors are eligible, except
those already holding 10 per cent of equity.

Shareholders' permission must be taken after

providing them with complete details.

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

of grant will be applicable.
Companies are free to determine the exercise-
price of the stock options they offer.

If the exercise-price is at a discount to the

market price, the discount will be treated as
a cost Shareholders' permission must be
taken after providing them.
 10 IMPT THING

1. Employee stock options are no longer

reserved for the executive suites
2. ESOs are still popular, even after the dot-
com crash.
3. Stock options can be expensive to
exercise.
4. . You'll see these common terms .
EXCERISE
STRIKE PRICE
5. There are two common types of plans
 10 IMPT THING(cont)

6. Nonqualified plans are special

7. There are three main ways to exercise
options
8. It's usually smart to hold options as long
as you can.
9. There may be compelling reasons to
exercise early
10. Tax consequences can be tricky
 The Good

Granting options to employees was

viewed as a good thing because it
(theoretically) aligned the interests of
the employees (normally the key
executives) with those of the common
shareholders.
 The Bad

Executives continued to focus primarily on

quarterly performance rather than on the
long term because they were allowed to sell
the stock after exercising the options.
Tax laws allowed managements to manage
earnings by increasing the use of options
instead of cash wages.
 The Ugly

Oversized rewards given by servile

boards to ineffective executives
Repricing options rewards
underperformers at the expense of the
common shareholder
Increases in dilution risk as more and
more options are issued
 TAXATION

According to the Central Board of Direct Taxes

(CBDT), when an employer issues shares to its
employees at less than the market price, the
employees have to pay a price on the
difference or perquisite value. When the issue
price is equal to the market price, the
perquisite value is zero and no tax needs to be
paid.
 TAXATION

Deductibility of ESOP Contributions: Company can deduct

principal and interest payments it makes on loans used to
finance stock purchased by an ESOP. This is because 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 loan from a bank or
other lender, with the borrowed funds being paid to the
sponsoring employer in exchange for employer securities.
 Why ESOP ?

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 the
creation and sharing of the wealth they help
create in an organization.

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 Why ESOP ? (contd.)

Potentially the most important reason: Selling

stock through an ESOP can defer or
permanently avoid taxation on any gain
resulting from a sale.
Owner diversifies assets while maintaining
control.
ESOP buys out dissident shareholders.
ESOP provides ownership succession for private
companies.
Merger & Acquisition financing strategy.

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 HOW DOES ESOP WORK

Most ESOPs act out of a trust or through a

board of directors.

In the case of board of directors, there is a

direct transfer of shares in the employee's
name from the company.

In the case of a trust, the company commits

itself to transferring a certain amount of
shares.

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 HOW DOES ESOP WORK

In place of actual stock options, companies can

also offer phantom stock options, which confer
stock appreciation rights.

Beneficiaries in such schemes receive a cash

payment equivalent to the rise in the values of
their respective notional stocks without actual
transfer of shares in their names.

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 MISCONCEPTIONS

Employees will take over

The trust owns the shares, not the

individual employee.

No share allocation until debt is repaid.

Selling shareholder can act as Trustee.

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 MISCONCEPTIONS

Repurchase agreement / Put option

Shareholders or Company can

repurchase stock from employees
allowing control over degree in
ownership

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 MISCONCEPTIONS

Company is less attractive to third party

buyers

Buyer can liquidate the ESOP.

Buyer can use ESOP to retain key

employees.

Buyer can use ESOP to finance acquisition.

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 QUIZ

Which is the option involved in ESOP?

1 CALL OPTION
2 PUT OPTION
3 PULL OPTION
4 PUSH OPTION

Ans CALL OPTION

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 QUIZ

VRS is a tool to downsize the employee

strength, Tool that helps in retaining
employee………….?
1 sacking
2 golden handshake
3 ESOP
4 factor analysis

Ans ESOP