Religare, already in the spotlight of a hostile takeover bid with the Dabur headed Burmans, has been facing a legal case. In the most recent turn of events in the case, the Enforcement Directorate has slapped provisions of PMLA (Prevention of Money Laundering) alleging misuse of ESOPs. In their legal filings, the Religare team has documented how the ESOP process was undertaken. Their documentation clarifies that the board approval was sought months ahead of the ESOP acquisition. There is also clarification about a borrowing process undertaken by the Chairperson for the fair-value on the ESOPs. Therefore, the ESOP plan followed not just SEBI’s 2013 legal structure, but also conformed with board approvals and the internal NRC committee recommendations.

To India Inc, the development may come as a huge surprise. Surprise, because CEOs and senior leadership are frequently rewarded with ESOPs, reflecting their role in driving the company’s strategic vision and performance. In Aug-24, Nykaa, an startup unicorn, had allotted15.9  crore equity shares under its ESOP plan. By offering equity, organisations ensure that their top executives are motivated to drive long-term company growth, with the potential for substantial personal financial gains. ESOPs are therefore believed to be excellent remuneration packages, but conventions of PMLA (Prevention of Money Laundering) upon Religare sends the wrong message. India Inc may interpret that rewarding talented employees with ESOPs could invite legal wrath.

In India, ESOPs are governed by a combination of corporate, tax, and legal regulations. Under corporate law, particularly the Companies Act of 2013, companies can issue ESOPs to their employees, directors, and officers, but with certain restrictions for independent directors and promoters. The issuance of ESOPs requires the approval of the board of directors as well as the shareholders via a special resolution. The company must also adhere to the guidelines laid out by the Securities and Exchange Board of India (SEBI) for publicly listed companies, ensuring transparency in the issuance and vesting of stock options. Until 2020, any board contemplating an ESOP would be busy scrutinising the tax angle. That, because when the options are exercised, the difference between the fair market value (FMV) of the shares and the exercise price was to be treated as a prerequisite and taxed as part of the employee’s salary under India’s Income Tax Act, 1961.

Second, when the shares were sold, any gains were subject to capital gains tax. The holding period between the exercise date and sale would determine whether short-term or long-term capital gains tax applies, with long-term capital gains on listed securities taxed at a lower rate. In the curious case at Religare, their legal team has provisioned the tax payment receipts showcasing that all legal processes were closely followed.

Some observers have been quick to point out the timing of Dr Saluja’s sale of the ESOPs – post the announcement of the acquisition from Dabur Group. The legal team has contested the claims. There is the reference to Tim Cook, the CEO of Apple who sold 200,000 shares of Apple in the week that the Cupertino headquartered tech-major launched a new upgrade. Should Tim Cook’s stock-sale in April 2024 be scrutinised? Fortunately, Mr Cook was not an Indian CEO.

Equating ESOP acquisition or a transaction under the tenets of money-laundering may not seem like a genuine investigation. That, especially in the absence of credible information about a material gain made by a leader the stature of Tim Cook or Dr Saluja. At best, the legal aspect seems like a misaligned adventure of blaming ESOPs and tarnishing the image of Dr Saluja who has steered Religare away from near-death. At its worst, it is a misinterpretation that India Inc should not reward talented and meritorious leaders. 

Finance has remained an alluring if not profitable area of business for countless years. In fact, finance has been the third most-oldest industry after agriculture and trade. In this age of AI, banking, insurance, or any financial service may seem like an easy proposition, but running a financial business is not for the faint-hearted. Besides fulfilling compliance requirements, and meeting regulatory guidelines, businesses have to be on the vigil for any volatilities and uncertainties. Above all, there is a compelling need to constantly watch out for the top-lines and stay ahead of competition. This explains why many corporate houses excelling in other areas such as manufacturing or trade have perished when it comes to operating a financial services firm.

A great deal of learning can be assimilated from Marx’s popular quip about history repeating itself – “first as a tragedy, second as a farce.” The banking and financial services industry has had its own share of tragedies and even farces. The 2008 financial crisis was one example of a tragedy but there have been countless financial crises with greater impunity. Pre-2008 examples of crises include a Roman crisis in the era of emperor Tiberius; or the great slump of the 15th century; or the Tulip mania of the 17th century; or the panic of 1785; or a crisis that shook Australia in 1893; or the 1910s post world-war 1 crisis. And while you are it, let us also pay homage to the countless lives ruined by either the great depression or the economic crisis.

Acknowledging the perils of a mismanaged financial services firm has therefore prompted policy-makers to tighten the policy-string from any and every financial services firm. In addition to scrutinizing books and compliance reports, regulators also perform periodic check on key management personnel to ensure a safe and fool-proof financial services operation. In fact, the larger society generally refrains from a public discussion of serious matters such as vested interests of acquirers, shoddy management, or bad ethics/principles, etc. The reasons could be risk to life, limb, property, or mental sanity of all degrees. But what the general public murmurs, regulators bring to discussion and ensure only the clean survive.

For either the RBI or the SEBI to probe an acquisition is not a difficult task. There’s a plethora of information available through the RoC data as well as FIU-IND investigations which can and have brought out some uncomfortable details. For instance, an FIU-IND investigation has repeatedly shown which NBFCs were mismanaged. The classification is something that even the Finance ministry has acknowledged and appreciated. Analysing this data leads one to the credible answer of a passionately-discussed hypothesis – are they fit to acquire that stake? The analysis also sheds light on the high-risk business and losses accounted to the acquirer in in its past.

The Reserve Bank of India (RBI) has established stringent guidelines to ensure that NBFCs operate under clean and robust corporate governance standards. The RBI under the leadership of a historian also realizes that this is not a trivial matter. In banking and financial services industry, reputation is paramount. While there may be arguments in favour of the synergies that a Burman-led Religare could bring to the table. These potential benefits must be weighed against the considerable risks posed by their historical mismanagement in the financial sector. Mint-street, meanwhile, too realizes that reluctance of the board to support the Burmans’ takeover attempt is not obstructionist stance but rather a protective measure for long-term stability and credibility of Religare.