FIs oppose liberal stock options, pay deals for top execs of new-age cos

Mumbai: Plans of listed new-age businesses to dole out liberal stock options and pay packages to some of their top employees are being opposed by institutional investors, including foreign funds. People with direct knowledge of the matter said investors are red flagging these stock option issuances on the grounds that these are happening at deep discounts to the current market prices.

Late last month, 82% of investors voted against an Employee Stock Options (ESOP) scheme proposed by Zomato. Similarly, 72% of institutions voted against the ESOP proposal of Delhivery.
In the case of digital payments company Paytm's parent One97 Communications, institutional investors voted against the remuneration proposals for founder Vijay Shekar Sharma and chief financial officer Madhur Deora. In the shareholder meeting on August 19, while most investors approved the reappointment of two directors including Sharma, about 76% of institutional investors voted against the remuneration proposed for Sharma. Similarly, 75% of these institutions also voted against the remuneration proposed for Deora. However, both the resolutions passed due to strong support from retail investors who hold the biggest chunk of shareholding in Paytm.
Corporate governance experts had recommended investors to vote against the company's remuneration proposals for reappointment of two directors. In February when Paytm asked its investors to ratify the ESOP scheme, 68% of institutions voted against the resolution.

Market participants said at least two more start-ups will have to get their ESOPs ratified by investors in the coming weeks. These proposals too could face some opposition from institutions.

"These companies are making vague disclosures regarding the ESOP allotments without details of the executives eligible for the ESOPs, the exercise price, vesting schedule, etc," said Shriram Subramanian, founder of corporate governance advisory firm, InGovern Research Services. "In some cases, the top few employees, including founders, will be getting the bulk of the proposed ESOPs. Listed companies, including any ESOP plans for their subsidiaries, should disclose the ESOP plans in greater detail when seeking shareholder approval."

The opposition also stems from concerns that continuous issuances of shares would keep diluting the share capital base, impacting existing shareholders.

Proxy advisory firm IIAS, which had recommended against the stock options to Paytm's Sharma, said in its report August 9, "he (Vijay Shekar Sharma) was granted 46.5% of the entire stock option pool, which is equal to 3.2% of the outstanding share capital. There is no disclosure regarding the vesting conditions relating to the stock option grants and thus, no alignment with the interest of shareholders."

Emails sent to Zomato and Delhivery remained unanswered. Paytm had declined to comment to ET's query before its voting results were published on Sunday.

Market participants said opposition to these ESOP programmes are also coming from foreign funds following strict Environment, Social and Governance (ESG) standards. But they don't have enough votes to block such resolutions. For instance, individual investors own 93% in Paytm, 87% in Zomato and 85% in Delhivery.

"In some of the cases, companies are proposing hefty ESOPs to even their subsidiaries and institutions are uncomfortable with this since the start-ups are growing through acquisitions," said a senior official of a custodian bank handling foreign institutions' back office in India.