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