At housewarming do after do, employees of Satyam Computer Services have been wringing T. Hari's hand in gratitude. As the company's Vice President, hr, he is overwhelmed by how much credit people give him-or the stock options plan he devised, rather-for the materialisation of their "dream homes".

And you thought ESOPs-Employee Stock Option Plans, to the uninitiated-were so passé, didn't you?

The truth is, they went through a bad phase when stock prices were sliding. With the 'recession' word in the air, they even went out of favour in the land of their origin, the US, and companies started axing their ESOPs. Recalls an Infosys spokesperson, "We suspended our ESOPs program since July 2003, because of accounting and regulatory issues both in India and US. As a result, ESOPs were valued much less than earlier."

Well, something has changed. The word on ESOPs has taken a U-turn. Employees are clamouring for them once again, and businesses are back to using them as an incentive tool for top talent. So even if you treat stories of millionaire secretaries as gossip, don't be surprised to find your company dangling stock options to squeeze better work out of you.

Wealth Creation

It's no secret that stock wealth is the real wealth that companies create in an economy, and having employees as owners-or potential opt-in owners-is a fabulous way to have them share that wealth. The idea started with the IT sector (or with the ad industry, actually), and has spread to pharma, biotech and other industries that are globalising themselves. Even media, now; TV18 has just offered its employees stock options.

How do ESOPs work? Simple. Say, your work is highly appreciated, and the company wants you to stay forever. Your job contract offers you the option of buying 1,000 of its shares at a price prefixed at, say, Rs 100-less than the current market price-whenever you want, so long as you're in the job, on the condition that you can start selling them only after two years ('the vesting period'), and that too, just 30 shares in any given year thereafter. This incentivises you to work like crazy, help double the share price in two years, claim your first lot of 30 share options, pocket the Rs 3,000 difference between the option price and market price (for 30 shares), and work like crazy year after year to claim more and more-till you retire.

That's an extreme model, of course (the career span bit), but most ESOPs are similar-with their gains dependent on ascending market prices. The broad idea is not just to incentivise you, but also align your interests with those of shareholders (so if anyone is fudging expense statements, you should feel cheated too).

But how are they allotted? This depends on company policy. At companies such as Biocon, on the basis of performance. Nirupa Bareja, Group Head (HR), Biocon, does not look at ESOPs as a retention tool, but as a reward instrument for key performers. At Satyam, all associates get stock options just for being employees. High performers get extra options.

Should You?

Sometimes, options are offered in lieu of a raise-or a cash bonus. So don't just make a grab for the options. Before making your mind up on whether to accept them, always read the fine print. The grant price, for example, must always be specified loud and clear-as also the conditions on which you can sell the shares. You also need clarity on what happens in case you quit your job-or if your job is terminated by the company. Also, what if your company is taken over?

Remember to be realistic about your potential gains, and give sufficient thought to the time-scale of the benefit. "One needs to have patience and a long-term perspective to see through the vesting period," says Anil Chopra, CEO, Bajaj Capital.

Also, check if it suits you as an investor. According to K. Pandia Rajan, CMD, Ma Foi Management Consultants Ltd, "Personal factors like financial situation, tax bracket, net worth, objectives and need for cash should be taken into account when one decides to acquire stocks."

The biggest call you must make is on how much the stock will appreciate over the years. Is your stock in a 'bubble' for any reason? Is your company headed up? If your company is yet to be listed, when will it be-and what are your alternative exit options? You need utmost clarity on this, according to Gautam Nayaka, a chartered accountant. Think like an independent investor, and it's best if your options are just part of a larger equity portfolio of diverse companies.

Once Bought In

Once you exercise the option to buy the shares, then you can choose to either sell them immediately to book profit (which attracts 30 per cent tax on short-term capital gains) or hold them for future gains (after a year, the tax falls to 10 per cent). "It is advisable to sell shares in small lots every year," says Chopra, "and this should be need- and not market-based." Nayaka, however, advises you to exercise your options at the peak-point just before switching jobs. If the share is declining, though, you might want to sell at the earliest. And yes, your options could just end up worthless-if the market price falls below your option price.

Still, once you become a shareholder in your company, you must operate with due caution to avoid any 'insider trading' allegations. You may be privy to 'non-published' information about your company that's stock-sensitive. So read the market regulator SEBI's guidelines on this carefully, don't try using privileged information to your advantage, and refrain from talking shop at family gatherings. If your company has an internal code, comply with it. But don't let the ESOPs maze baffle or bother you. Stock options remain a good idea. If all goes well, they could give you your dream house faster than any salary package can.

Where To Invest Now

Investment circumstances have changed. So should you churn your investment portfolio?

By Ashish Gupta

"In the short term the markets behave as voting machines. But, in the long term they always behave as weighing machines.''
Benjamin Graham in The Intelligent Investor, the classic bestseller on value investing.

What graham wrote during the Great Depression of the 1930s is still worth thinking about. What he meant, shorn of the mechanical analogies, is that markets are moved in the short run by fear, greed, speculation and other such factors, but in the long-term, they always gravitate towards the fundamentals of value.

So what happened on Manic Monday, May the 17th, when the BSE Sensex crashed by 564 points, can be attributed to voting machine behaviour of the market rather than any change in the fundamentals of the economy. Explains Ajay Bagga, CEO, Kotak Mutual Fund: "The political fluidity of the situation, with all kinds of rumours flying around, with spokespersons of various political parties going public with so-called 'policy announcements', played a significant role in hurting market sentiment and creating a lot of uncertainty.''

The new Common Minimum Programme (CMP) of the United Progressive Alliance (UPA), now ruling at the centre, seems to bear a distinct imprint of the Left-especially on matters of disinvestment and labour policy, the trickiest parts of the market reforms agenda. This has given business analysts and investors a big royal headache.

And the after-effects are not over; the indices continue to yo-yo-though with less volatility, as investors slowly overcome the old left-versus-right ideological oversimplifications. Some of the 'hot money' of foreign institutional investors (FIIs) may have fled India in panic at the sight of a sickle, but the Sensex is quite high in contrast with where it was a little over a year ago. So now that the scenario is slightly less hazy, the question is: how much has changed, and what does it imply for your investments?

Cautious Optimism

Two factors have kept Wall Street commentators edgy these past few weeks: oil and China. Oil prices continue to rule high, even as China's political decision to slow itself down to keep its economy from overheating (an acknowledgement that pace isn't all people want) reshapes the price outlook for several commodities. It is not easy to make voter or weighing machine distinctions in the responses to these two factors.

But what about India-is the 'Shining' story over? Not at all, chorus analysts, pointing to the fact that even during Dalal Street's worst nightmare-May 1 to May 20-the FIIs withdrew only around $700 million, which pales in comparison with a total investment of some $40 billion. More interestingly, even on that Manic Monday, about Rs 443 crore flowed into various mutual funds.

"The India Story is absolutely intact,'' says Dilip Bhat, Director (Research), Prabhudas and Liladhar. His argument: growth is projected at 6-6.5 per cent for 2004-05, inflation is expected to stay at around 5 per cent, the monsoon is likely to be good, foreign exchange reserves are expected to rise, corporate earnings are on an upswing, and the price-earnings ratios of Indian stocks are still attractive. That makes quite a fair picture.

Jayesh Patel, Head (Research), LKP Shares and Securities, is confident of the Sensex returning to the 6,000-mark within the next four-to-six months. But that will entail, as he points out, some strong positive triggers: when "pragmatism takes over rhetoric'' by the Left parties; reform measures by the Cabinet; a progressive CMP; and finally, a reform-oriented Budget. But, as Bagga adds, "Till then, the country will have to live with a lot of volatility and the Sensex is going to be range-bound anywhere between 4,500 points and 5,500 points.''

In all, there's no reason to let your investment outlook get rattled. Hang on to your portfolio. But still, changes there have been-and will be. So what would a good investment strategy look like?

Where To Invest

When capital appreciation is in doubt, many mutual fund managers recommend companies that pay out huge dividends-the actual reward on equity ownership. Hero Honda, for instance, paid a 1,000 per cent dividend last year. Even Oil and Natural Gas Corporation, which suffered the brunt of the no-disinvestment panic, is an attractive dividend stock.

"Investing in sectors such as information technology, pharmaceuticals and fast moving consumer goods (FMCG), which are largely immune from political upheavals, could be another good bet,'' contends Patel.

Then there are also direct beneficiaries of a shift in the policy framework. For instance, as Patel reasons, a major push in agriculture could benefit fertiliser companies, even as wider purchasing power boosts FMCG, automobile and other stocks. So what companies would he suggest? "On a one-year perspective, I would bet on Telco, Hero Honda, Ranbaxy, Reliance Energy, Tata Power, Bharat Heavy Electricals Limited, Infosys, Oriental Bank, Canara Bank and GAIL," recommends Patel.

The software and pharma export stories continue as before. Also, the power sector is still hot, say analysts. The government has clarified that power generation will be left in the public sector domain while distribution is increasingly turned over to private players. This spells a bright future for companies such as BHEL, which has its books paced with orders for three years, as also Reliance Energy.

What about banking-another sector that could possibly be affected by a policy shift? For Motilal Oswal, Chairman and MD, Motilal Oswal Securities, the sector holds promise. Retail investors, he says, should look at some public sector banks such as UTI Bank, State Bank of India, Union Bank and Indian Overseas Bank-all well-run banks that could benefit from a rural turnaround. Meanwhile, private sector banks such HDFC Bank and ICICI Bank could gain from their strong urban retail focus. In the auto sector, though, he is betting on Hero Honda and Maruti, in pharma on Aventis and Cipla, and in cement on Grasim and Birla Corporation.

Buying Opportunity

No matter the CMP details, the UPA has emphasised the need to deepen and widen economic reforms. Remember, people with the world's best-regarded economics and business education are in charge, and they know the folly of sacrificing growth for equity. So what is the final word for investors? Abide by what Warren Buffett once said: the best time to get in is when there's blood on the streets. Do you want to risk missing what could turn out to be a historic buying opportunity?