Demand raised for grant of ESOP to independent directors

Mumbai, Mar 31 Experts have raised a demand for allowing independent directors to avail grant of stock options.

The idea is to make the performance of independent directors better.

Talking to Bizz Buzz, Arun Kejriwal, founder of Kejriwal Research and Investment Services, said, "It is a good thing as even independent directors are being given an opportunity to be awarded ESOPs."

This will make their performance even better as there is a reward available, he added.

The current regulatory framework permits payment of remuneration to independent directors only by way of sitting fees for attending meetings and commission, which is restricted at 1 per cent of the net profits for all the non-executive directors (if there is a managing/whole-time director).

The Companies Act, 2013 specifically prescribes that an independent director shall not be entitled to any stock option. "Law may permit grant of stock options to independent directors. Independent directors devote their valuable time to address strategic issues in corporate Boards and use their expertise while guiding the management of the company from time to time. Over the years, average time commitment for board service has augmented", says Chandrajit Banerjee, Director General, CII.

Generally, the objective of issuing stock options is to provide incentive to attract, retain and reward employees of the company. "Motivating independent directors to contribute to the long term and sustainable growth of the company, needs to be reflected in their rewards. Stock Options enable a reward mechanism that is linked to the long-term goals of an organisation, he said.

Banerjee further mentioned that this is evident from the reduction in number of companies, wherein a person can be appointed as an independent director, from 10 listed companies to now 7 listed companies. "This restriction is also leading to a dearth in the number of persons willing to and being eligible to be appointed as independent directors. Apart from the time commitment, the independent director's role has become more challenging also due to intense scrutiny from stakeholders, greater demands imposed by regulatory requirements and an increase in overall complexity of the business environment" said Mr Banerjee.

Globally, USA, UK, Canada, Australia, Singapore, Hong Kong, to name a few, do not expressly prohibit stock options for independent directors. Considering all of the aforesaid, there is merit for the Regulators including Ministry of Corporate Affairs and SEBI to consider permitting grant of stock options to independent directors with such checks and balances in place as may be deemed fit and appropriate and with the prior specific approval of shareholders.

Banerjee further mentioned that "it is encouraging to see that the SEBI Consultation Paper for Review of Regulatory Provisions related to Independent Directors (currently open for public comments) has touched upon the issue of whether there is a need for reviewing the remuneration structure for IDs". It seeks views on whether ESOPs with a long vesting period of 5 years, be permitted for IDs, in place of profit linked commission and the maximum limit of remuneration through ESOPs.