Co subsidiaries can give ADR-linked ESOPs

Indian companies engaged in the IT software and IT services, would now be entitled to issue ADR/GDR linked stock options to the permanent employees (including Indian and overseas working directors) of its subsidiary companies incorporated in India or out of India and engaged in IT software or IT services subject to the eligibility criteria and other parameters announced earlier, the release said.

The decision has been taken keeping in view the essential features of the relationship between the parent company and subsidiaries such as staff movement between the parent and subsidiary companies, inter-linkage of the parent and subsidiary companies and complementary of the functions between the two.

The government had been considering expansion in the coverage of employees who would be entitled to the ESOPs in line with the Sebi guidelines on ESOPs which covers employees of a subsidiary company for the purpose of ESOPs.

Infosys was the the first company to issue ADR-linked stock option which score over the plain-vanilla version in two ways. First, for employees stationed abroad, they are easier to keep track of, and also cash in. Second, for a few companies like Infosys, their Nasdaq shares have been trading at a significant premium to domestic stock prices.

The ADR/GDR linked stock options is becoming important as Indian software companies are positioning themselves as global players. Just paying high salaries has proved less than successful in retaining skilled talent because there are always people abroad who are willing to pay even more for skilled Indian software engineers.

The worry an Indian company had while posting people abroad was that some bright employee might decide to give up their stock option if he was being offered a job with an American company that also offered stock options. For software engineers planning to stay on abroad, it made much more sense to choose a dollar-denominated option over a rupee-denominated one. But the new ADR/GDR linked stock option has successfully addressed this problem.

With Indian stocks listed abroad ruling at high prices and price-earning multiples, this option can be used as a powerful bait for attracting fresh talent.

FDI CLARIFICATION: The government today clarified that its recent decisions to promote foreign direct investment (FDI) were aimed at removing bottlenecks and securing additional investments to the tune of 10 billion dollars a year in infrastructure to sustain high economic growth.

Allaying fears expressed through some reports, an official press note said the decisions were in line with the president’s address to the joint session of parliament on October 25, 1995 stating that the government would review the existing regime of FDI to remove hurdles and put FDI clearances on an automatic route.

Following the interim report submitted by the group of ministers (GoM) which was reviewing the existing sectoral policies and sectoral equity, the cabinet at its meeting on June 12 decided to allow 100 per cent FDI for E-commerce subject to the condition that such companies would divest 26 per cent of their equity in favour of the Indian public in five years, if these companies were listed in other parts of the world.

Further, these companies would engage only in business to business E-commerce and not in retail trading implying, inter alia, that existing restrictions on FDI in domestic trading would be applicable to E-commerce as well. The condition of dividend balancing on specified consumer goods with effect from the date of issue of the press note may be removed subject to the condition that the export obligation and the concomitant dividend balancing would be applicable till the date of withdrawal of the condition.

Any upper limit for foreign direct investment in respect of projects relating toe electric generation, transmission and distribution (other than atomic reactor power plants) may be removed, it was clarified.

As far as E-commerce is concerned, it would be seen that existing restrictions on FDI in domestic trading would be applicable to E-commerce as well. Further, it is mandatory for companies to disinvest 26 per cent of their equity in favour of the Indian public in 5 years.

The decision on removal of the condition of dividend balancing was taken in the background that while the foreign exchange outflow on account of dividend is not very significant, this condition is often perceived by the foreign investors as restrictive and thus inhibits FDI.