Mumbai: More and more senior executives across listed Indian firms are exercising stock options and selling the shares to book profits in the current market rally. Some of them are buying fresh shares using the profits.

Deepak Parekh, non-executive chairman of mortgage lender Housing Development Finance Corp. Ltd (HDFC), sold 150,000 HDFC shares on 17 September at an average price of Rs686.7 a piece.

Its vice-chairman Keki Mistry sold 72,500 shares and Renu Karnad, managing director, sold 81,443 shares over the next week.

Bimal Jalan, former Reserve Bank of India governor and an independent director of HDFC, sold 5,200 shares on 29 September.

After booking profits, all three HDFC executives, bought fresh shares under the company’s employees stock option plan (Esop), effectively increasing their holdings.

A company awards stock options to the employees, based on their performance. Under an Esop, the employees have the right to buy the shares of the company on a predetermined date at a predetermined price. Once they sell shares, they pay 33% fringe benefit tax on the profits booked.

An HDFC spokesman said the company has not granted any new Esops in 2009 and 2010. “As you are aware, Esops that have been granted need to be exercised within the stipulated period or else they would lapse and, therefore, some staff have to sell their shares to generate funds to exercise these Esops," he said.

Parekh still holds 1 million shares, or 0.69%, of the firm.

Experts say employees are exercising options as stock prices are surging. The Bombay Stock Exchange’s bellwether equity index has rallied 17% so far this year. On Tuesday, it closed at 20,407, and is 466 points short of its record high close in early 2008.

“Esops help companies to align senior-level pay with shareholder-value created," said Padmaja Alaganandan, India business leader, human capital, Mercer Consulting.

Equity pay as an element of compensation has been on the increase since 2000 but the actual quantum of stock granted to employees depends on how much equity dilution to employees has been approved by shareholders and whether new approvals are required.

Globally, Esops and other forms of equity pay such as restricted stock, performance shares have emerged not only as a retention vehicle, but also as an intrinsic element of how pay is delivered. “In India, they are also becoming a tool for senior-level hiring and companies often buy out unexercised options to hire top-level officials," Alaganandan added.

Banking and financial services companies have had a strong culture of such equity offerings, but in recent years, chemical and cement companies have also started using equity based pay.

Rajiv Lall, chairman, IDFC Ltd, which has allotted 5.67 million such shares this year, said Esops are a win-win proposition. “Especially, if such shares are locked up for a year or so, it can be ensured that the employees stay where they are. It is a win-win situation for both the company and the employees."

Siddarth Raisurana, executive director, ABC Consultants Pvt. Ltd, a head hunter, said the hiring spree in certain sectors is also contributing to a higher number of Esops being exercised.

“Typically, Esops are issued with three year lock-ins, with the option for employees to sell up to 33% of the holding. So, if an employee leaves mid-way, he loses these Esops not exercised. Therefore, companies which hire typically issue stock options to cover the value of options that went unexercised with the earlier employer," he said.

A Mint analysis of Esops exercised in the past three years shows that the number of options exercised so far this year is almost double that was exercised during the whole of last year.

Of the 50 Nifty firms, 23 have allotted 118.3 million shares to employees since January. At Tuesday’s closing price, they are worth Rs7,000 crore. In 2009, Nifty firms issued 69.1 million shares under Esop schemes and in 2008, they issued 48.4 million shares.

The phenomenon is not limited to Nifty firms. At least 119 of CNX-500 firms have allotted 233 million such shares this year. Last year, 105 firms allotted 133.7 million such shares.

On Tuesday, Reliance Industries Ltd allotted 391,000 shares and ICICI Bank Ltd 88,105 shares. DLF Ltd and IndusInd Bank, too, allotted shares as more and more employees are exercising their options to book profits.

In September alone, HDFC allotted nearly 1.7 million new shares under Esops. It has allotted over 5.72 million shares to employees so far this year. HDFC Bank leads the tally, having issued nearly 7.4 million shares worth Rs1,800 crore at Tuesday’s prices.