MC EXCLUSIVE Groww, Physicswallah, other newly listed tech firms face institutional opposition over ESOPs

ESOP

• Investors oppose ESOP plans at new tech firms due to dilution concerns
• Retail investors and promoters passed ESOP resolutions despite institutional opposition.
• Experts call for fair ESOP disclosures, aligning employee, management, and shareholder interests.

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Newly listed companies, especially tech companies, are getting the first taste of shareholder opposition, as institutional investors are voting against Employee Stock Option Plans (ESOPs) in maiden shareholder meetings.

Voting data analysed by Moneycontrol shows that at least half a dozen resolutions floated by newly listed companies for ratification of ESOPs have faced opposition from institutional investors.

Companies where such voting has taken place in recent months include Groww, Physicswallah, Capilliary Technologies, We Work and Saatvik Green Energy.

Red flags

Investors key concerns are around the exercise prices granted and potential dilution due to the ESOPs among others.

However, all these proposals managed to sail through due to retail investors, who either abstained or supported the proposals.

In companies where there are identifiable promoters, ESOP proposals also received support from them, data shows.

The Securities and Exchange Board of India (Sebi) rules mandate that companies should get all their related party transactions(RPTs) and ESOP proposals ratified in the first shareholder meeting after the listing.

For instance, 62 percent of institutional shareholders voted against the proposal floated by WeWork India to ratify and amend its ESOP plan. WeWork has 49 percent promoter holding and these shareholders backed the resolution, which passed with an 82 percent support.

Similarly, in the case of Groww, 48 percent of institutional investors opposed ratification of the ESOP plan but the resolution sailed through with 90 percent support as retail investors backed the proposal.

In the case of Capillary Technologies, half of the institutions voted against the move but it passed with 89 percent investor support.

Clash of interests

According to experts, a primary factor driving this voting behaviour of institutional investors is the need for an alignment between management and employee incentives and shareholder interests.

"The underlying principle is simple — incentives of management and employees must be aligned with those of shareholders. Where this alignment is missing, opposition from institutional shareholders is inevitable,"  Prime Database managing director Pranav Haldea said.

"Two factors matter most — what is the dilution impact and how does the ESOP exercise price compare with the prevailing market price. If the exercise price is significantly lower than the market price, shareholder concerns naturally arise."

According to Haldea, startups tend to structure ESOPs more generously when they are unlisted, largely because future success is uncertain. Thus, to attract and retain the right talent in such an environment, higher incentives are often necessary.

"However, once a company becomes publicly listed, ESOP structures typically need recalibration to ensure they remain fair and balanced for all stakeholders," Haldea said.

Given the increasing number of tech companies looking to make their market debut, governance experts say upfront fair disclosures of such ESOP schemes will become even more important for companies to ensure these resolutions pass shareholder votes without much opposition. Tech companies typically tend to have larger ESOP pools compared to other sectors.

“The main factor taken into consideration is the percentage dilution in equity capital that happens because of the ESOPs. The other factors include the vesting schedule, the exercise price, the reasons for the ESOPs, the employee coverage, etc.,” said Shriram Subramanian, Founder of proxy advisory firm Ingovern. Aggressive vesting schedule or coverage of only a few individuals would be red flags for institutions, he said.

“Companies have to make true and fair disclosures on the entire ESOP programme without the board taking away the powers of the shareholders by seeking to modify the ESOP programme at their discretion,” he added.