The Chartered Accountant

DECEMBER 2008 1026 THE CHARTERED ACCOUNTANT
BANKING AND FINANCE
THE OPTIONS BACKDATING
It is quite well known that a stock option
means the right to buy a number of
shares of stock at or after a given date in
the future, known as the exercise date, and at
a given price agreed upon at the time of granting
the Option (usually at the current market
price (CMP) or about 95% of the CMP). Stock
options are normally given during the ‘build’
phase of a company so that its executives may
build the employer company as entrepreneurs
and participate in its wealth building exercise.
This is a sort of ‘Goal Congruence’ exercise
that the HR managers always dream of. Granting
of ‘stock options’ normally
ensures increasing the
stock market price of the
company’s equity over a period
of time. On transfer of
such stock options the grantee
of the option may earn
Capital Gains, which are tax-
able at concessional tax rates,
and compare favourably with
‘Income from Salaries’. Thus
In In 2006, after the scandals at EnEnron and WorldCom, ‘Options
Backdating’ rocked the US Corporate
world. Heads rolled and
the regulator woke up to to unveil
a new new corporate game. ‘Options
backdating’ could not not be termed
‘illegal’ in the the US because because laws
related related to this vary from State to
State, but everybody is convinced
that it is a new kind of Corporate
lie. This article explains how how the the
Backdating game was played in in
the US and how how it impacted corcorporate India.
— CA. E. Srinivasa Charyulu
(The author is a member of the Institute.
He can be reached at caonweb@
rediffmail.com)
granting stock options is preferred to the granting
of other perks or monetary incentives. Being
an incentive scheme offered to executives, ‘Stock
Options’ also help the Companies in their ‘build’
stage to conserve cash and to improve treasury/
working capital management, because options
are granted as performance based incentives that
incur no cash outflow. It is a ‘you build, share the
growth and you gain’ philosophy. Stock options
have become extremely popular in the e-Software
industry, and the industry leaders — Microsoft,
Infosys, Wipro, and recently TCS — have benefited
a lot out of this along with their employees.
Whereas the value of Stock option
does not impact the bottom line,
the salaries and bonus paid to the
employees do. Stock options stimulate
the growth of entrepreneurs
and also help in the creation of industry
leaders in corporate world.
In Option backdating game, the
corporations resort to the practice
of backdating the grant of the option,
i.e., the date of the granting