ESOP Valuation

1 ESOP Valuation | Valuation of ESOP | Valuation of ESOP in India | ESOP Valuation for Unlisted Companies | IFRS | SEBI Registered Category 1 Merchant Bank ESOP Valuation Retaining and motivating employees is one of the biggest challenges in front of human resource managers in today s highly competitive world. ESOP Valuation Retaining and motivating employees is one of the biggest challenges in front of human resource managers in today s highly competitive world. Employee Stock Exchange Plan (ESOP) is becoming one of the preferred tools to achieve this challenging task. New generation Information Technology companies started using ESOPs to retain and motivate the highly skilled employees in an extremely competitive IT sector where talent poaching from competitors was an industry norm.

2 The sense of ownership encouraged the employees to pursue long term career aspiration in an organisation. Companies in many other sectors such as BFSI, FMCG and manufacturing followed the suit and with the emergence of new growth sector of e-commerce, ESOPs have become an integral part of corporate strategy in managing and harnessing human capital. Employee Stock Option- A Brief Introduction An employee stock option is a right given by company to its employee to buy shares at predefined price. The ESOPs granted under the plan confers a right but not an obligation to purchase the shares on the employee. Stock options are subject to vesting period often known as lock in period, requiring continued service over a specified period of time.

3 Upon completion of vesting period, employees can exercise the options to purchase the shares by paying the pre-defined exercise price. ESOP Valuation Currently, Indian companies follow guidance note 18 on accounting for employee share based payment (2005) issued by ICAI for accounting treatment of ESOPs. Organisations offering ESPOs are required to account ESOPs as part of employee compensation cost in P&L at the time of ESOP grant which is apportioned over the vesting period of ESOP. IFRS require companies to use fair Valuation of ESOPs at the time of accounting ESOPs expense in income statement, while the Indian GAAP provides an option to either using fair Valuation method or intrinsic Valuation method.

4 Intrinsic value method? Intrinsic Value is the excess of the market price/value of underlying share over the exercise price of the Option. Example: - A hypothetical company grants an ESOP to its employees whose current market price of the share is Rs 1000 which can be exercised after 5 years for Rs 700. In this case the intrinsic value of options shall be Rs 1000-Rs 700=Rs 300. Fair Valuation Method Fair Valuation method uses option Valuation models: Black-Scholes-Merton model and the binomial model. These models compute the value of option as difference between likely values of share at the time of exercise of option as discounted to present value and the present value of paying the exercise price.

5 Option pricing models consider five major variables such as the tenure of the option, exercise price, fair value per share, expected volatility of share price and risk-free interest rate for computing the value of options. Valuation for perquisite tax on ESOPs: The Central Board of Direct Taxes (CBDT) vide notification number 1805(E) dated 23rd October, 2007 has included Rule 40C in the income-tax Rules; which has prescribed the method for determination of fair market value of specified security or sweat equity share, being a share in the company. Salient features of this rule are: In a case where, on the date of the vesting of the option, the share in the company is listed on a recognized stock exchange, the fair market value shall be the average of the opening price and closing price of the share on that date on the said stock exchange; In a case where, on the date of vesting of the option, the share in the company is not listed on a recognized stock exchange, the fair market value shall be such value of the share in the company, as determined by a Category 1 Merchant Banker registered with the Security and Exchange Board of India, on the specified date.

6 Role of RBSA in ESOP Valuation The procedure of ESOP Valuation may be complex. Choice of the most appropriate approach, model and assumptions is reliant on having sufficient knowledge of the operational and financial guidance of the business and the industry in which company operates. The Financial Advisory Services experts at RBSA Advisors offer a blend of accounting, Valuation and financial reporting to assist you in ESOP Valuation . RBSA is a Category 1 Merchant Banker registered with the Security and Exchange Board of India and hence, eligible for providing ESOP Valuation for any regulatory purpose. Credentials: Following are select credentials in ESOP Valuation : Valuation of ESOP for Reliance Power for Financial Reporting purposes Financial Advisory Services for Valuation of Equity Shares of UFO Moviez India Ltd.

7 For ESOP purposes. Valuation of ESOP of Reliance Globalcom Ltd. for Financial Reporting Purposes under IFRS Financial Advisory Services for Fair Valuation of Equity Shares of RML Information Services Pvt. Ltd. for ESOP Purpose Valuation for Equity Share Options granted against Ordinary Shares of Hero MotoCorp Ltd. and appointment as Merchant Banker for Implementation of ESOP Scheme as per SEBI (Share Based Employee Benefits) Regulation, 2014 RBSA Services Share Swap Valuation SEBI Merchant Bank Restructuring Valuation Liability Valuation Investors Engineer IFRS Valuation Finance Due Diligence Valuation Business Valuation Valuation of Brands, Intangible Assets & Intellectual Property Valuation of Financial Securities, Instruments & Derivatives Valuation of Industrial Assets, Plant & Machinery Valuation of Real Estate Valuation of Infrastructure Assets & Specialized Assets Purchase Price Allocations for Mergers & Acquisitions Impairment Studies for Tangible Assets Impairment Studies for Intangible Assets & Goodwill Mines, Mineral Advisory and Valuation Valuation of ESOPs and Sweat Equity Valuation for Tax.

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