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CRISIL Buys Back Shares, Gives Them To Employees as ESOPs

You gotta admire the gall. CRISIL – the credit rating agency:

  • decides to buy back shares at a max price of 1,000, for upto 80 cr. on 15 Dec 2011
  • By 30 December 2011 it’s bought back 910,000 shares at an average price of Rs. 871, and closes the buy-back.
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  • In Feb 2012, they decide to issue nearly as many shares back to employees as ESOPs.
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You see the way this works? Use company cash reserves to buy up 9 lakh shares from the market. You think, as an investor, that this is good because now the company’s profit is spread across fewer number of shares and that will drive EPS up.

But no, there will be new shares – about 9 lakh shares, almost exactly the same quantity – issued as ESOPs to employees. So the EPS won’t change much for existing shareholders.

Employees will have to pay current market price for these ESOPS, but effectively the company is paying for them. ESOPs are like options, and five year maturity options at Indian interest rates is a pretty hefty sum per share. A three year ATM option for the Nifty at 5200 strike costs about 1,200 rupees, which is about 20% of the Nifty – a five year option for a more volatile CRISIL would cost something like 25%

Effectively, at Rs. 900 per share, the option costs the company Rs. 225 per share. A grant of 9.35 lakh shares costs the company more than Rs. 20 crores, Not all of that will be appropriately accounted this way, I’m sure.

Interestingly, SEBI doesn’t allow ESOPs to be granted or exercised when a buyback offer is on. Little wonder that they wrapped up the buyback in 15 days!

I wonder if institutions will oppose such behaviour. It used to be common in the US in the late 90s, when Dell, Microsoft and Intel were buying back shares and issuing ESOPs constantly. In fact, Dell even wrote put options on its own stock (and ended up making both big gains and losses). But given that it is illegal to run these simultaneously in India, and that institutions do hold CRISIL, I hope the larger investors ask tough questions.

Disclosure: no positions.