Creating an Employee Welfare trust is one of the ways through which Employee Stock Options (ESOPs) can be issued. Under this mechanism, the Trust borrows money to buy shares from open market. The trust then issues shares to employees when they exercise their ESOPs. After the employees exercise their ESOPs, the trust repays its loans.
In case of Indiabulls Financials, the trust borrowed a loan of nearly Rs 900 crore from the company in order to buy shares for ESOPs. With this loan, the trust bought shares at an average price of Rs 174. In FY12, the company recognized an interest income of Rs 120 crore on the same loan.
Veritas alleges that the interest was paid by the dividend income on the shares held by the trust. It also says that the trust would not be able to repay the loan and this arrangement is made only to boost Indiabulls Financials earnings. Since it is a normal practice followed for issuing the ESOPs, the motives are hard to justify. In addition, the repayment of loan would only happen after the exercise of the options by the employees.
At the current market price of Rs 210, the stock is trading at a trailing twelve month P/E multiple of 6.3. Excluding the interest income of Rs 100 crore from the trust, the stock's P/E translates to 7.5. This is still lower compared to its peers like LIC Housing Finance and Dewan Housing, which are trading at an average PE of 14.4 and 46 respectively.