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Sunday, January 29, 2017

Is it fair for DCB to extend ESOP exercise period due to strategic change?

A niche private sector bank DCB(Development Credit Bank) was named by Motilal Oswal in its annual wealth creation study as a potential 100x bagger, subject to management validation :D
In Oct-15, they announced an ambitious plan(http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/22B0BC71_2E4B_42AF_8CE5_3CABA08280AE_171649.pdf)  to double their branch network in 12months. They had even stated upfront that this investment would pay back only in 3-4 years. Unsurprisingly, despite their detailed planning, the stock market punished them by hammering down the stock by ~50%. Then the management rolled back the plan and said they would consult the analysts going forward  http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/6577829A_1250_4D5C_AE43_DF6253C10D48_080642.pdf

Things settled down and the stock has nearly returned to its earlier levels. However, while reading the annual report, I came across this nugget indicating repricing of stock options 
During the year under review, the Bank has extended the exercise period from 5 years to 8 years from the date of vesting for all the unexercised options in force, as on July 1, 2015

I could not locate any specific shareholder approval for this measure, and it appears this was done to protect employees from their underwater stock options(remember the shares as at Mar 31,2016 was trading at ~Rs 70/share vs earlier levels of 140). This is quite sad that the 3yr extension was given without revising the exercise price upwards. Where is the skin in the game for the management to feel the pain like equity shareholders? Ironically, this extension happened even when the stock price was way above the weighted average exercise price of Rs 47(as at 31 Mar 2015), and hence most options would not have lapsed. 

Dr Vijay Malik has explained the volte face of the management very beautifully in his blog post

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