How are firms in your portfolio giving away Esops?

livemint.com:

₹480 crore in the same company. Whether that is legally right or not, to me, this does not reflect a high level of corporate governance. If it was, all this information would have been public right from get go.

There is one other reason I am interested in this. Esops are earnings dilutive. For the same amount of earnings if there are more shares, then you get a lower earnings per share.

And therefore, if Esops, which amount to issuing new shares, are not handled well, the “loss" to some stakeholders just compounds. Take for instance a company that regularly gives out 1% of new shares as Esops every year. By the end of the 10th year, it would have given 10.5% of the company away, which, if not done well, is a hit to the earnings per share.

A good policy would make up for this dilution in terms of having the best talent, which would reflect in higher profitability. Given that price is a multiple of earnings per share and a valuation multiple, the loss in total value of the company is a multiple of that. It can be potentially very significant.

Now, of course, I am making some assumptions. The Esops are not free, they are paid for. But for a company that does not need to raise capital, the dilution needs to be very well justified.

Some may be thinking about the company buying shares from the market and giving them. This, while not being dilutive, still impacts the company as the cash paid out could have earned interest income or been paid out as dividends. So, there’s a cost there too.