Wipro is planning to grant 6m stock options (1% of its equity) as a part of its plan to implement a restricted stock award scheme for its middle-level managers, who constitute between 10% and 12% of its workforce. The options would have a vesting period of five years (20% each year) and come with a nominal exercise price. Industry sources say that the price may be as low as Rs 10 per share.

Wipro shares closed at Rs 637 on Saturday. A senior investor relations official confirmed that the company had recently sought approval for issue of grants from the compensation committee at the annual general meeting.

The stock award scheme involving grant of 6m options is in continuance of the 'restricted stock awards' which Wipro introduced last year. Analysts estimate that close to 2,000 employees would be beneficiaries of this scheme and would be entitled to options worth Rs 20 lakh over a five-year period.

The granting of stock options is expected to be charged to the profit and loss account. It is estimated that the company's net profit will be affected as a result of the grant. However, many on the street believe that the scheme may allow the company to retain middle-level managers. At the same time, they believe that the pressure on earnings due to award of these options may act as a pressure point for revising billing rates upwards. Company officials declined to elaborate further.

A fund manager at a leading institutional brokerage pointed out that the dilution of the equity will mean that the price differential between the exercise price and the grant price will be borne by the market.

"The company will not show this compensation as a part of the cost of revenue," the fund manager said.

Though Wipro officials denied any possibility of the stock award scheme leading to low salary increases , analysts expect that salary increases would be lower than estimated. A low cash-based salary would have a positive impact on margins and profits, they said.

"The actual impact on net profit would be reduced as margins could come better than anticipated for FY06, which is the full year of write-off. The effective P&L impact of the charge for the next fiscal could only be 2%", a CLSA report said.

The compensation committee at Wipro took into account factors like parameters of employee eligibility and the period over which shares would vest in the hands of employees.

Accounting for restricted stock means factoring in the real market value of the shares, rather than the perceived value of the option. Unlike an Employee Stock Scheme (ESOP) which has four stages - consisting of the actual granting of the option, vesting, exercise (conversion of options into shares) and sale by the employee - in a restricted stock option scheme, there is no process of exercising the option and converting it into a share.

Eligibility of employees is based on performance, seniority and number of years of service. On vesting, employees pay for the share at a pre-determined price, after which they become shareholders.

If employees refuse to accept the shares by paying the pre-determined price, the award scheme lapses. Caveats are built in to prevent immediate sale of shares. In volatile markets, stock award schemes are considered far more attractive than options.