At Indiabulls Housing A New ESOP Trust May Somewhat Do The Job Of Pending Buyback

This comes at a time when the company’s proposal to buy back shares is under a cloud due to SEBI regulations. While the timing could likely be coincidental, one outcome maybe common. Support for its stock.

The New Stock Option Plan

The non-bank lender is seeking shareholder approval through postal ballot—the result of which will be declared on Dec. 24—for creation of share-based employee benefit scheme and employee welfare trust. The company has proposed:

• To buy 1.7 crore shares from the secondary market—or up to 4 percent of paid up equity of the company.
• The shares will be bought as per the employee benefit scheme and vested over a three or more year period.
• At current market prices, that would cost the company Rs 400 crore.

The new stock benefit scheme and trust, the company said, will replace the four ESOP schemes (two in 2006, one each in 2008 and 2013) currently in force. “The trust route is being taken because a trust offers greater flexibility to administer a variety of employee welfare schemes, both stock-linked and non-stock linked,” the company said to BloombergQuint.

There’s one important difference between the operation of the extant schemes and the proposed trust. The ESOP schemes require the company to issue fresh shares when the employee exercises her option. That results in equity dilution, however, marginal. The proposed trust will acquire shares from the open market in compliance with SEBI regulations such as within a defined trading window and with prior disclosures. The purchase from the open market reduces the supply of shares in the market and supports the stock price, however marginal.

To be sure, the new proposal might also be more attractive to the financier’s employees.

Of the 2.45 crore stock options outstanding as of March, 2.03 crore options will have an exercise price between Rs 700 to Rs 1,150 apiece. That would lead to an equity dilution of about 4.7 percent, the company said, adding if the options aren’t exercised, they would lapse. But shares of the company closed at Rs 237.35 apiece on Friday—a price that offers employees no incentive to exercise these options.

Indiabulls Housing has always had employee stock benefit schemes with the aim that about 40 percent of the compensation of the top 200 or so key employees comes from stock benefit schemes, said the company.

Under the trust route, pricing of share options will be based on the market price of the share on the preceding day of the grant or average of high and low price of the stock for the two weeks prior to the date of grant, whichever is higher.

• The new scheme will allow the company to buy shares in accordance with SEBI regulations, including the prevention of insider trading regulations.
• It would either transfer cash from stock appreciation or shares to the employees upon exercise of stock option.
• The shares bought will be held by the Employee Welfare Trust, Indiabulls Housing said.
• Regulations don’t allow the trust to trade in shares.
• The trust will have its own independent trustees and a single trust can administer multiple schemes and employee benefit programmes, the company said.
• The shareholding of the trust will be shown as non-promoter and non-public shareholding.
• The trustee of the trust will not vote over the shares held by the trust.
• The trust shall be required to make disclosures and comply with the other requirements applicable to insiders or promoters under the SEBI Insider Trading Regulations.

Status Of Buyback Proposal

Meanwhile, the non-bank lender has been as yet unable to secure approval from the market regulator for its proposal to buyback shares, over ambiguity in guidelines pertaining to buybacks by financial services companies.

The consolidated debt-to-equity ratio threshold of 2:1 for any company seeking to do a buyback prevents such financial services firms from undertaking buyback. Though the market regulator had relaxed this threshold, to 6:1, in cases where the NBFC is a subsidiary of the parent seeking to do the repurchase. But it’s not clear if this 6:1 threshold will apply if the primary company doing the buyback is an NBFC.

Indiabulls Housing is still awaiting regulatory clarity on that and may seek a regulatory response via the informal guidance window, said a senior company executive privy on the condition of anonymity. It’s board considered the buyback in October as its market value has been trading at a steep discount to historical valuation multiples. The stock has declined over 70 percent so far this year on the back of a widespread liquidity crunch across NBFCs compounded by rumours of financial trouble at the company and whistleblower complaints.

New ESOP Structure Vs Buyback

While the company has not yet disclosed the size of buyback its considering, regulations permit it to spend up to 10 percent of its networth on such a repurchase. Currently that would amount to a maximum buyback of Rs 1,870 crore worth of shares at prevailing market price.

Buybacks are often deployed by companies to shore up their share price:

• via purchase of shares, thereby reducing supply and volatility;
• and their subsequent extinguishment, thereby enhancing capital ratios.

In the event that the buyback proposal fails, the new ESOP Trust scheme—also involving the purchase of shares from the open market—could mitigate the problem, though only partly and temporarily. Because the purchased shares will not be extinguished and hence will not reduce the company’s equity base.

The company did not comment on whether the shift to an ESOP trust structure was due to ambiguity over buyback guidelines. But the senior executive cited earlier said the company intends to spend not more than Rs 400 crore and hence will pick only one of the two routes, adding it would prefer the employee welfare trust route.