This is the first known case where in an institutional investor had to move court to refrain its own nominee-director from accepting ESOPs.
MUMBAI: The Bombay High Court on Monday passed an injunction against Kranti Sinha, Life Insurance Corp’s (LIC) nominee-director on the board of Larsen & Toubro (L&T), on transacting the L&T shares he recently obtained under an employee stock option plan (Esop).
This is the first known case where in an institutional investor had to move court to refrain its own nominee-director from accepting ESOPs.
Under Securities and Exchange Board of India (Sebi) guidelines, ESOPs are meant for whole-time directors, employees, and officers of an organisation. Exempt categories are promoters or directors, with over 10% holding in the company. Allotment of ESOPs to independent and nominee-directors is a grey area, open to individual interpretation.
“It is morally incorrect for the nominee-director to allot shares to themselves. ESOPs are for the benefit of employees and should remain so. It should not be for the nominee-directors, whose real reason for being on the board is to represent their institution’s interest and not personal enrichment,”
Nitin Potdar, partner of law firm J Sagar Associates, which represented LIC, said.
Kranti Sinha had recently obtained 20,000 L&T shares at Rs 35. Against the then market price of Rs 1,700, it would have been worth Rs 3.4 crore.
Sinha had obtained these shares against LIC’s instruction, leading to the insurance company filing a case against him.
Potdar said LIC’s contention was not to transfer Sinha’s shares (20,000 in this case) to itself, but to cancel them, so that the same shares could be given to more deserving employees.
This is the first instance where an LIC nominee-director has acted against the instruction of its employer and accepted ESOPs.
“In all other cases, LIC has asked its directors not to accept any such shares and they followed the instructions,” he said.
This injunction could potentially open the floodgates of similar complaints, since it appears that many independent and nominee-directors of various financial institutions have been part of the ESOP schemes.
“Institutions have always been criticised for their inactivity on the board. Here is a clear case of an institution proactively stopping its nominee- director from benefiting from a way which is not ethically correct,” Potdar said.
On ESOPs to independent directors, Potdar said there were other ways a company could reward them. “The sitting fees have been hiked considerably, and then there is a 1% net profit sharing clause,” he said.
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