Government Seeks To Use ESOPs To Maximise OFS Subscription

The Indian government is leaving no stone unturned in its drive to meet the divestment target of Rs 30000 crore. In the latest attempt in this direction, it has asked the Securities and Exchange Board of India (SEBI) to allow an employee stock option provision (ESOP) in the newly-launched OFS route. It has also requested the SEBI reduce the cooling off period between successive offers from 12 weeks to 2 weeks.

As per the Department of Public Enterprises (DPE) regulations, the government can only offer ESOP during a public offer as per which the government reserves quota of 1% to its employees. The OFS route, however, does not have such a provision, which has made it difficult for the government to include employees’ contribution in such offers.

The amendment will enable the government to offload further stake in companies. One can expect to see the government reserving 1% quota for employees during the OFS and then again issuing ESOPs to eligible employees after the cooling off period. Even if only one of them is approved by the SEBI, the government will still be able to raise some funds.

We may see the decision on this coming in before the next round of divestment (NTPC and SAIL) expected in January 2013. NTPC's OFS is expected to offload 9.5% of the government's stake in the company, to generate about Rs 12000 crore. A similar offer for SAIL would see the government selling 10.82% stake in the company and raising about Rs 4000 crore.  Both these stocks are beaten down on the exchanges this year, and the new amendments would ensure that all options can be fully utilised by the government to achieve full subscription.

On earlier occasions too, the government has tweaked some of the SEBI norms to meet its divestment targets. Upon the request of government, the regulatory body has reduced the requirement of margin money from 100% to 25%, which helped achieve about 95% participation in NMDC's OFS, which raised upto Rs 6000 crore.

The SEBI has also reduced the gap between two offers for sale from 12 weeks to 2 weeks. This amendment is yet to used, but may come to the government’s rescue if it is not able to meet the divestment targets.

As for price discovery, one has to watch the discount the company gives to its employees. If the stock is made available at a steep discount, it will not be taken well by the markets as it will be an indication that the employees are not ready to shell out a high price for the companies’ stocks. Another thing that needs to be watched for is how employees respond to ESOPs if these are offered. A huge response would create some positive sentiment for the stock, otherwise it will lead to a negative sentiment around the scrip.

In sum, though the idea of ESOPs looks good on paper, what it needs is proper execution.