L&T stock options: ‘serving one’s own cause too’, says IiAS

Our Bureau Mumbai | Updated on January 16, 2018

‘A large portion seems to have accrued to the board’

Did Larsen & Toubro’s senior management use the listing of its two subsidiaries to pocket some extra benefits? Proxy advisory IiAS seems to think so.

“L&T’s executive directors have been opportunistic — they have generously issued themselves stock options at face value from subsidiaries before their IPOs,” a report released by Institutional Investor Advisory Services (IiAS) said. “The manner and timing of these issuances raise questions on L&T’s governance practices, and the checks and balances the company has in place.”

In July, L&T Infotech raised ₹1,200 crore from the primary market, while L&T Technology Services went public in September, raising ₹894 crore. The listings were part of the engineering behemoth’s plans to unlock value from its over 121 subsidiaries.

Gain for shareholders

“As a conglomerate with several businesses, L&T’s decision to list these businesses as they reach critical mass is good for its shareholders,” IiAS noted. “But, L&T’s management has also made the most of the opportunity — through the issuance of stock options (ahead of going public).”

Infotech issued a total of 49 lakh options at face value; the notional gain (based on recent current market prices, and which will occur over the vesting period) aggregates to over ₹310 crore. L&T Technology Services issued 4.15 lakh stock options at face value, the notional gain (based on the IPO upper band price, and which will occur over the vesting period) aggregates ₹360 crore, according to IiAS’s calculations.

A large portion of the stock options seem to have accrued to the board, IiAS observed.

In the case of Infotech, 35 per cent of the ESOPs have been granted to the board, and 19 per cent of the total pool has been granted to non-executive directors belonging to the L&T board. In the case of Technology Services, 53 per cent of the total pool has been granted to its board, and 36 per cent to L&T’s board members.

“Three of L&T’s board members (AM Naik, SN Subrahmanyan, and R Shankar Raman) have received stock options from Infotech and / or Tech Services,” the report found. “As board members of L&T, they are already responsible for the growth of these businesses — do they need to be rewarded separately just because these businesses are getting listed? We believe not.”

‘Questionable governance’

The advisory also called into question the timing of the grant of options with L&T Tech Services. “These stock options were issued between the filing of the draft red herring prospectus (DRHP) and the red herring prospectus (RHP). Between the DRHP and the RHP, companies would have estimated the market appetite for the equity as well as arrived at a broad understanding of the price range at which the book-building process will close. Issuing stock options this close to listing at face value is assured money, irrespective of what the vesting and exercise periods are.” IiAS said the grant of options in such a manner raises questions on the company’s governance quality. It called for “upholding the value system that the company has been built on.”

L&T declined to comment on the matter.

Published on September 22, 2016

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