It must be an event of some magnitude that can erode Infosys Technologies' net income for 2001-02 by 36 per cent and Wipro's by 23 per cent. The debate over the finer points of accounting for stock options may seem an exercise in pedagogy but it is just the thing that can wreak havoc on the balance sheets of the two companies. Most companies use the Intrinsic Value Model to put a number to their spend on stock options (See Stock Options 101 to cut through the jargon). There's a growing debate in the US that they should use the Fair Value Method. If they did, and if their Indian peers followed suit, then, the profits of the two worthies mentioned in the first sentence of this piece would suffer as enumerated. The stockmarket regulator, Securities & Exchange Board of India (SEBI) is ambivalent-either method will do for it.

Investing maven Warren Buffet is all for the Fair Value Method. He once argued: ''If options aren't a form of compensation, then what are they? If compensation isn't an expense what is it? If expenses shouldn't go into the calculation of earnings, where in the world should they go?''. And more recently Federal Reserve Chairman Alan Greenspan questioned the wisdom of Financial Accounting Standards Board (FASB) in allowing companies to footnote the impact of moving from the Intrinsic Value Model to the Fair Value Method.

The list of those opposed to the shift is equally stellar. Intel's Andy Grove and Cisco's John Chambers, among others, have argued that the shift would destroy corporate profits and cause a meltdown in valuations. India's tech savants have been content to wait and watch developments in the US before making up their minds. ''They want to see how companies who adopt the change are valued by the US market,'' explains Kaushik Dutta, Partner (Global Capital Markets Group), Pricewaterhouse Coopers. And Infosys' official line is that it is still debating the shift and hasn't reached a conclusion yet.

It isn't easy to value stock options. In India, like in the US, the tech carnage has meant most options are still under water. ''The bulk of our options are under water and have a vesting period of six-seven years,'' says S.L. Narayanan, Corporate Vice President, Finance, HCL Technologies. ''We can't expense them out using any arbitrary method.'' Although SEBI regulations ensure that options are issued at the prevailing market price, that doesn't make them free. But the proactive companies that provide for the cost may find, a few years later, that they have expensed for options that haven't been exercised. ''We believe stock options have a cost,'' agrees Wipro's Corporate Treasurer, Shankar Jaganathan. ''We are just not sure of how to cost them.''

The growing distrust of corporates and the emergence of 'transparency' as corporate virtue #1 in the US could force companies in that country to move to the Fair Value Method. India's technology companies-the US is their biggest market-may follow suit. And options will never be the same again.

-Seema Shukla

E-NA(I)DU
Add To Shopping Bag
Chandrababu Naidu's decision to adopt e-procurement could be a way out for a state weighed down with debt.

Chandrababu Naidu: Beyond the hype

There's a new mantra in Nara Chandrababu Naidu's digital realm. From tyres to computers to medical supplies, Andhra Pradesh has decided to experiment with online procurement in four departments. The move to buy online could save several crores of rupees for the cash strapped state-its 2001-02 fiscal deficit was Rs 7,335.99 crore. Then, there's the small fact of the Malaysian government having tried out e-procurement, successfully, something that may have influenced Naidu, always keen to be seen as an innovator, to try it out. AP it Secretary (hr and Special Projects) A.P. Sawhney won't put a number to the savings, but admits that the project presents several challenges ranging from altering buying processes to training both suppliers and government employees. Maybe some e-learning would help.

-E. Kumar Sharma

Stock Options 101
A crash course in options jargon for the uninitiated.

APB 25: The Accounting Principles Board's opinion number 25, issued in 1972. This requires companies to account for, in their financials, the compensation cost of an option: the difference between the market price and the issue price.

Black Scholes Model: An accepted method of valuing stock options, this is, in effect, a complex formula developed by economists Fischer Black and Myron Scholes in 1973. It works by looking at the price of a portfolio that comes with the same risk and the same return as the option.

Exercise Price: The price the employee will pay when she exercises her right to buy the stock.

Expiration Date: The date at which an option expires.

Fair Value Method: The way some people want options to be treated under GAAP. This is based on SFAS 123.

Grant Date: The date when the option is issued.

Intrinsic Value Model: The way options are currently dealt with under US accounting principles. This is based on APB 25.

SFAS 123: Statement number 123 issued by the Financial Accounting Standards Board (FASB) in 1993. This calculates the compensation cost of an option using the Black Scholes Method.

Underwater Option: This means the current difference between the stock price and the exercise price is zero.

Vest Date: The date after which an option can be exercised and sold.

Vesting Schedule: How a stock option vests-50 per cent may be in two years; the other 50 per cent could happen over the next five years.

SERVICES
SSSSSSSSimply Sssssssssuperb
The services sector will rescue the Indian economy this year too.

The services sector: Like this dabbawala, it will serve it up hot, again

Between march, when they put out their first estimates for the rate at which the Indian economy would grow this year, to August, when drought-like conditions (the government is averse to calling it a drought) in several areas of North India forced them to revised their numbers, India's economists have been a busy lot this year. Thus, Mumbai-based Centre for Monitoring the Indian Economy (CMIE), changed its GDP growth estimates from 4.5 per cent to 3.15 per cent; HDFC Securities' Head of Research S. Naren, his from 5.4 per cent to 3.7 per cent; and cement major Gujarat Ambuja's Chief Economist Kiran Nanda, hers for the agriculture sector from 1.7 per cent to zero, and for the industrial sector from 3.5 per cent to 3.2 per cent. Strangely, no one thought it fit to revise their estimates for growth in the services sector. CMIE and Naren left theirs untouched at 6 per cent, Nanda, at 6.5 per cent, and the Tata Group's Economic Advisor Jiban K. Mukhopadhyay did one better by upping his estimates for the sector from 7.3 per cent to 7.5 per cent.

Economists have reasons-actually two of them-to believe that the services sector (it constituted just under 51 per cent of India's GDP in 2001-02) will do well this year. First, between April and September this year, the industrial sector grew by a cheery 6.7 per cent, compared to an anaemic one per cent last year. The two sectors share a direct, and reinforcing relationship. Ergo, services should see some good times.

Second, agriculture grew by a healthy 5.7 per cent in 2001-02 making available some Rs 40,000 crore in additional income to farmers. Even if a third goes into servicing debt or into savings, the banking and financial services sector (part of services) will gain. ''Services will ride on the back of impressive growth in banking, insurance, and telecom sectors,'' predicts Navin Aggarwal, Head (Securities), Motital Oswal Securities. The construction industry, a key constituent of the services sector is, in one short sweet word, booming-it is growing at an average of 30 per cent a year. And both software and it Enabled Services (ITES) are expected to do well and grow this year, by 18 per cent and 68 per cent, respectively.

The services sector, then, looks set to grow by 7 per cent, and without breaking into a sweat. However, achieving a consistent 9-10 per cent growth in services is a different ball game. That'll require both industry and agriculture-more industry than agriculture-to grow consistently. With industrial growth hamstrung by a variety of structural ills (lousy infrastructure and a still high cost of capital to name two), that seems a dream. Still, seven is good.

-Ashish Gupta

A-TEAM
Jaswant's Sextet
Finance Minister Jaswant Singh has got a team in place; now for some action.

Finance Minister Jaswant Singh

Ajay Vikram Singh, Revenue Secretary
Vikram Singh was Jaswant Singh's trusted lieutenant in the Defence Ministry. He may not know much about the revenue department, but he knows his minister and is reported to be a hard worker.

Vijay Kelkar, Economic Advisor
The buzz is that Singh brought in Kelkar, former finance secretary, and before that, petroleum secretary, from the IMF (he was serving as Executive Director) as advisor to give his team a market- and business-friendly look.

Ashok Lahiri, Chief Economic Advisor
Taxation expert Lahiri's credentials are impeccable, and Singh may have just been thinking about them when he retained former finance minister Yashwant Sinha's nominee as chief advisor.

D.C. Gupta, Secretary, Financial Sector
Sinha had done away with the post of Secretary, Banking in his first effort to downsize the minister. Singh may have just been creating a post for someone he is comfortable with when he tapped Gupta, a Rajasthan cadre civil servant for the post.

S. Narayan, Finance Secretary with additional charge of the Department of Economic Affairs
Narayan, a straight-shooting reformer, is the second senior most bureaucrat in the government after Kamal Pandey who was made cabinet secretary.

C.S. Rao, Expenditure Secretary
Like Narayan, Rao is a finance ministry veteran. A government deep-throat claims he is close to a key BJP ally, N. Chandrababu Naidu. Obviously, allies need to be kept happy.