Presentation Transcript

1. Opportunities for Citibank in Public Sector RituShrivastava April 09, 2014 Global Markets Information Classification:Internal
2. Project Overview Opportunities for Citibank in PSUs in India Analyze the foreign exchange and commodity risk exposure of PSUs Company- wise analysis to find specific opportunities Product Idea linked to Employee Stock Ownership Plan(ESOP) Understanding ESOP policies offered by Indian Companies Product development on an idea based on Equity Linked Notes and ESOPs Analyzer for FDI, ODI and ECB data Developing a user interface for an easy access to FDI, ODI and ECB data 1 2 3
3. 1. Opportunities for Citibank in Indian Public Sector Enterprises
4. Companies analyzed MAHARATNA Bharat Heavy Electricals Coal India Limited GAIL (India) Indian Oil Corporation NTPC Oil & Natural Gas Corporation Steel Authority of India NAVRATNA Bharat Electronics Bharat Petroleum Corporation Hindustan Aeronautics Hindustan Petroleum Corporation Mahanagar Telephone Nigam National AluminiumCompany Neyveli Lignite Corporation NMDC Oil India Limited Power Finance Corporation Power Grid Corporation of India RashtriyaIspatNigam Ltd Rural Electrification Corporation Shipping Corporation of India MINI- RATNA - I Airports Authority of India Antrix Corporation Limited BalmerLawrie & Co. Limited Bharat Dynamics Limited BEML Limited Bharat Sanchar Nigam Limited Bridge & Roof Company Limited Central Warehousing Corporation Central Coalfields Limited Cochin Shipyard Limited Chennai Petroleum Corporation Limited Container Corporation of India Ltd Dredging Corporation of India Ltd Engineers India Limited Ennore Port Limited Garden Reach Shipbuilders & Engineers Limited Goa Shipyard Limited Hindustan Copper Limited HLL life care Limited Hindustan Newsprint Limited Hindustan Paper Corporation Ltd Housing & Urban Development Corporation Limited India Tourism Development Corporation Limited Indian Railway Catering & Tourism Corporation Limited IRCON International Limited KIOCL Limited
5. Mazagaon Dock Limited Mahanadi Coalfields Limited Manganese Ore (India) Limited Mangalore Refinery & Petrochemical Limited Mishra Dhatu Nigam Limited MMTC Limited MSTC Limited National Buildings Construction Corporation Limited National Fertilizers Limited National Seeds Corporation Limited NHPC Limited Northern Coalfields Limited North Eastern Electric Power Corporation Limited Numaligarh Refinery Limited ONGC Videsh Limited Pawan Hans Helicopters Limited Projects & Development India Limited Railtel Corporation of India Limited RashtriyaChemicals & Fertilizers Limited RITES Limited SJVN Limited Security Printing and Minting Corporation of India Limited South Eastern Coalfields Limited State Trading Corporation of India Limited Telecommunications Consultants India Limited THDC India Limited Western Coalfields Limited WAPCOS Limited MINI- RATNA - II Bharat Pumps & Compressors Limited Broadcast Engineering Consultants (I) Limited Central Mine Planning & Design Institute Limited Ed.CIL (India) Limited Engineering Projects (India) Limited FCI Aravali Gypsum & Minerals India Limited Ferro Scrap Nigam Limited HMT (International) Limited HSCC (India) Limited India Trade Promotion Organization Indian Medicines & Pharmaceuticals Corporation Limited MECON Limited Mineral Exploration Corporation Limited National Film Development Corporation Limited National Small Industries Corporation Limited P E C Limited Rajasthan Electronics & Instruments Limited
6. Foreign Exchange and Commodity Exposure Oil and Gas companies are clearly the outliers in forex and commodity space (Tranche I) Many trading companies also have a significant forex exposure (Tranche II) Large manufacturing companies have significant forex and commodity exposure Commodity Exposure('000 crore) Commodity Exposure('000 crore) Forex Exposure ('000 crore) Forex Exposure ('000 crore) TRANCHE-II TRANCHE-III Forex Exposure ('000 crore)
7. Total Foreign Exposure of Public Sector Enterprises Total foreign exposure of top public sector enterprises in India is Rs 7,69,146 crore Oil and Gas Companies cover almost 84% of this, followed by trading and manufacturing companies with 8% and 7% coverage respectively
8. Wallet Sizing for Citibank in Spot and Forward Market If Citibank captures 20% share with 1 bp margin, expected revenue will be 2.56 Mio USD in the spot market Assuming 10% of the forex position is hedged, expected revenue will be 0.25 Mio USD in forward market
9. Company wise Analysis Companies Oil and Gas Companies Trading Companies Manufacturing Companies
10. Exposure analysis of Oil and Gas Companies IOCL is the market leader in oil and marketing space with 36% of total forex and 40% of the total crude oil exposure of oil companies #2 HPCL 18.49%, #3 BPCL 15.61%, #4 MRPL 13.74%, #5 ONGC 7%
11. The Value Chain In the value chain maximum risk is carried by downstream sector (refining and marketing) Upstream Companies Downstream Companies ONGC (OVL) Oil India Limited HPCL (HMEL) BPCL (NRL) IOCL (CPCL) GAIL MRPL
12. Case Study: Bharat Petroleum Corporation Limited(BPCL) Mr. Chandra Dev Singh, Head of Derivatives- Risk Management, BPCL (International Trade) Imported: 75%, Indigenous: 25% Oil Supplying Countries Middle East Nigeria Malaysia Price: Linked to Argas and Platts benchmarks Refineries Mumbai Refinery Kochi Refinery Numaligarh Refinery Bina Refinery
13. Risk Management Policy Objective: Maximizing Gross Refinery Margin Maximize { Steps Followed Gross Refinery Margin(GRM) calculation on the basis of forward price curves and expected demand/supply of products and raw materials Threshold for GRM Hedgingis decided by the board in the beginning of the year. Usually this is equal to the fixed cost incurred to run the refineries. Refinery Hedging during the year is done by floating a tender to consortium of banks depending on the market view and the decided threshold Freight and Individual Product Hedging is also done depending on the transportation cost and export requirements respectively
14. Threshold Trigger For the current year BPCL has a threshold of 22% of their GRM BPCL has not hedged anything in last 2 months as oil prices have remained range bound Most of the Middle East Suppliers have their supply price floored at $100 USD/barrel. Unless this floor is hit, they believe there will be no expected turbulence in the oil market C
15. Refinery Hedging Instrument- Crack Spreads Crack Spread = Refined Product Price – Crude Oil Price Refiners are LONG crack spreads and to hedge they SHORT crack spreads Common Crack Spreads Gasoline Crack Kerosene Crack Naptha Crack High Sulphur Fuel Oil (HSFO) Crack Type of Crack Spreads 1:1 Crack Spread 3:2:1 Crack Spread 5:3:2 Crack Spread Naphtha: 15% (Sell 150 bbls) Kerosene: 15% ( Sell 150 bbls) Crude 100% Buy 1000 bbls Gasoil: 50% (Sell 500 bbls) HSFO 20% (Sell 200 bbls) Banks with aggressive crack spread quotes Goldman Sachs Morgan Stanley Barclays JP Morgan Deutsche Bank
16. Potential Opportunity- Rapidly increasing refining capacity from 215 to 302 MMT by 2017 IOCL BPCL HPCL NRL
17. Excess capacity points to weaker Refinery Margin Consideration Refinery Hedging Refining capacity addition will exceed the incremental demand over 2014-2017, pointing towards weaker refinery margins RBI Regulation PSU companies active in Refining Hedging BPCL IOCL HMEL Permits hedging of risks to existing refineries like margins, inventory, product sales and freight for oil refining and marketing companies
18. Changing Landscape of Commodities Market is an opportunity for Citibank “Barclays has reduced its presence in commodities, while other banks including CréditAgricole and UBS have virtually closed their commodities businesses.” - Financial Times, Dec 2013 “ Deutsche Bank slashes commodity trading operations” – Financial Times, Dec 2013 “JPMorgan has put up for sale its physical commodities business” - Reuters, May 14 “Morgan Stanley agreed to sell its physical oil business to OAO Rosneft (ROSN) as the investment bank backs away from owning some physical commodities businesses.” - Bloomberg, Dec 13 “Citibank increasing its gas and power business in Europe as competitors such as Bank of America Merrill Lynch and Barclays are pulling back” – Reuters, May 2014
19. Revenue Estimation from Crack Spread Hedging With comparatively lesser competition in commodities than in forex, expected annual revenue for Citibank can be around 0.39 Mio USD (optimistic estimations)
20. Freight Hedging Consideration Indian Scenario Indian OMCs enter into shipping contracts for hiring carriers from different shipping companies to bring oil The various modes of sea borne transportation used by Indian OMCs are Voyage Charter: Employment of a vessel for a specific and certain voyage Time Charter: Employment of a vessel for a specific period Contract of Affreightment(COA):Extended form of voyage charter where certain number of voyages are covered under one contract at pre specified rate. Shipping expense is the second most important expense after crude oil purchase for oil refining companies Freight cost of operating a vessel greatly fluctuates with the cost of shipping fuel, also known as bunker fuel. Pricing Factors Bunker Fuel Price Distance between load port and discharge port Size of the cargo - Very Large Crude Carriers (VLCC) (260 TMT), Suex Max (130 MT) and Afra Max (80 TMT). Capability of load port of handing vessels Availability of vessels *Source: Ministry of Petroleum, Report on LONG TERM PURCHASE POLICY AND STRATEGIC STORAGE OF CRUDE OIL
21. Country-wise Crude Oil Import by Indian Companies Time between loading at major Importing countries to unloading at Indian Refinery Norway Azerbaijan Iraq Iran Kuwait Algeria Egypt Saudi Arabia Mexico UAE Sudan Yemen Nigeria Venezuela Brunei Colombia Cameroon Malaysia Congo Eq. Guinea Ecuador Brazil Angola Australia 6-7 Days 10-14 Days Up to 30 days
22. Crude Oil Transportation- Scenario in India *Source: Ministry of Petroleum- Crude Oil Import Data 2012-13 and 2011-12
23. Declining oil production from domestic suppliers will put significant pressure on imports “Supply of crude oil from domestic sources has been on a decline owing to the reduction in ONGC’s production volume. BPCL’s dependence on imports for meeting the crude oil requirements of its refineries therefore has been increasing” - Annual Report 2012-13, BPCL Citibank in Freight Business “Citi Energy Risk’s Freight House of the YearAward – 2010” Opportunities Indian Scenario RBI Circular allowing Freight Hedging: “Oil refining and marketing companies, which have substantial overheads on account of freight component, are permitted to hedge the freight risk in international exchanges/OTC markets on the basis of the underlying exposures.” BPCL undertook hedging of freight cost of the tankers in 2012-13 taken on spot charter and COA. The freight cost for the year 2012-13 for BPCL amounted to INR 3824 crore
24. Freight Hedging Solutions Freight Forward Agreement A financial forward contract that allows ship owners, charterers and speculators to hedge against the volatility of freight rates Example Seller: Citi Bank Route: TD3 Period: Q4 14 Quantity: 20kt (knot, 1 nautical mile= 1.852 km) Contract Price: XX Contract Regulation: ISDA
25. Revenue Estimation for Citibank through Freight Hedging Citibank did a trade with State Trading Corporation of India Ltd. on freight hedging for wheat import in 2008.
26. Inventory Hedging- A good target for Repo Financing Consideration Indian Scenario Inventories of LPG, Kerosene, Diesel, Jet Fuel, Petrol and Fuel Oil have to be maintained at numerous locations like Ports, Refineries, Pipeline installations, marketing depots, Airports etc. to ensure uninterrupted availability of products OMCs carries inventories in the range of 10 MMT of crude oil/feedstock and products which are valued at Rs.25000 crores Inventory Value= MIN (Acquisition Cost, Net releasable value) Though not representative of operational efficiency, such fluctuations in oil prices can have a major impact on the inventory value, which in turn can have a disproportionate affect on the profitability. According to the RBI circular, hedging of inventory up to 50 per cent of the volumes in the quarter preceding the previous quarter is allowed. Currently only IOCL does hedging for inventory management
27. Structured Solutions: Gas Companies (GAIL) Gas Users and Requirements Power Sector - Fixed INR or Fixed USD prices Floating prices with pre-defined worst-case Fertilizers Fixed INR prices Petro Chemical/ Refineries - Floating USD prices linked to Brent instead of Henry Hub)
28. Structured Solutions
29. Foreign Exchange Exposure Operating Expenditure Linked Exposure Buyer’s Credit Working Capital Packing Credit Post- Shipment Credit Capital Expenditure Linked Exposure ECBs
30. Case Study: Hindustan Petroleum Corporation Limited(HPCL) Mr. AnupamPathak- Manager, Risk Treasury- HPCL Buyer’s Credit 1 Suppliers from Middle East offer a credit window of 30days and do not really mind extending it to 60days OMCs have a usual operational cycle of 30 days (6-7 days transportation, 10-15 days processing and 6-7 days of marketing) hence there is no mismatch if payment collection in smooth Delayed in under-recovery payments lead to a lot of liquidity crunch in the past, at a point of time they were carrying 100% buyers’s credit on their books but now the situation has improved significantly RBI has opened Revolving Credit Lines for IOCL, BPCL and HPCL where they can borrow an repay directly through RBI. As a result, they have not availed any buyer’s credit since Sep 2013. Packing Credit and Post Shipment Credit 2 As these companies have limited export exposure they generally do no avail any packing and post shipment credit. Nothing has been availed in last 2-3 years
31. External Commercial Borrowing 3 A target for borrowing cost is set by FRMC (Financial Risk Management Cell) in the beginning of the year Position is then dynamically hedged throughout the year to maintain the FRMC target
32. Recommendations Once rupee stabilizes, RBI will stop the revolving credit facility There is a lot of competition in buyer credit and ECB hedging space as they always ask consortium of banks to quote For other smaller transactions, they call up top 3-4 banks and take the best quote. Though size of these trades is small but cumulatively they add up to decent amount of around INR 100000 crore
33. Trading Companies Public sector trading companies have a net foreign exchange exposure of Rs 61,897 crore MMTC is the leader with 38% market share followed by State Trading Corporation, PEC Ltd, MSTC and Shipping Corporation of India
34. MMTC India’s largest international trading company and the highest foreign exchange earner for India after oil refining companies Citibank currently is not a part of MMTC’s consortium of banks. Coal India Ltd. has not being able to meet Fuel Supply Agreement with power utilities this year. Therefore, they have floated a tender to import 6 Million tons of coal worth Rs 3000 crore from Australia and South Africa. MMTC has won this tender. NTPC Limited also has floated a global tender for importing 7 million tons of coal to feed 12 of its thermal power plants across the country MMTC has also offered 80,000 tons of wheat for exports from the Kakinada port Recommendation Because of the large forex exposure MMTC can be a good company to focus on With Rs 800 crore worth transportation cost, freight hedging solutions can also be pitched to MMTC on possible routes
35. Note of Caution for Trading Companies However, with trading companies we will have to be extra careful about their financial condition. Some of them have not being doing well for last few years
36. Manufacturing Companies: Coking Coal Opportunity Steel companies in India are worried about the import of Coking Coal Major raw material for steel making process are Iron ore, coking coal and limestone Steel Authority of India Limited (SAIL) The raw material import expenditure of SAIL is Rs 12886 crore. Iron Ore- Supplied through captive mines Lime Stone and Dolomite- Captive mines and domestic suppliers Coal - 75% of coking coal requirement is met through Imports RashtriyaIspat Nagar Limited RashtriyaIspat Nigam Ltd depends entirely on coking coal imports to meet its demand. Net imported coking coal in 2012-13 is Rs5000crore
37. Other Companies with significant FX Exposure
38. Other Companies with significant FX Exposure Contd.
39. Hedge for Dearness Allowance – Inflation Linked Bonds PSU companies pay dearness allowance to their employees which is directly linked to inflation index CPI Dearness Allowance is a significant cost for labor intensive companies Mining Companies like Coal India Limited, Neyveli Lignite Corporation etc. are very labor intensive and are hence exposed to significant Inflation Risk.
40. Coal India: Inflation a serious cause of concern For Coal India Limited, Employee Benefit Expense forms around 50% of the total cost and a major part of it is dearness allowance. Recommendation Inflation Linked Bonds can be pitched as potential investment solution to Coal India Limited
41. FX Opportunity: Plans of prepaying the dollar denominated loan is under consideration
42. 2. Product Idea linked to Employee Stock Ownership Plan(ESOP)
43. Stock Based Compensation Plans
44. Stock Based Compensation Plans
45. What areEmployee Stock Options and SARs? ESOP is a right, not an obligation, to buy shares at a pre-defined price at a future date Exercise price is fixed in the beginning and is usually below the spot price at issuance ESOPs can be forfeited for non-fulfillment of certain conditions like leaving the company SAR: Like ESOP, SARs benefit the holder with an increase in stock price but the settlement is through cash instead of equity Stages of ESOPs
46. What are Employee Stock Purchase Plans(ESPPs)? An employee stock ownership plan in which employees can purchase company shares at a discounted price Employees contribute to the plan through payroll deductions Exercise price is fixed in the beginning and is used to calculate the number of shares to be allotted No capital protection in case stock price plummets ESPP Example: Company: ABC Limited Spot Price: Rs 100 Employee XYZ receives compensation worth Rs 10 lakhs in the form of ESPP
47. Design Consideration of Employee Stock Ownership Plans Option valuation method Taxation Vesting Schedule Exercise Price Exercise Period Legal and Regulatory Framework Frequency of Issuance Quantum of options 1 2 3 4 5 6 7 8
48. Target Companies Our Target Employee Share Purchase Plan with secondary purchase Employee Stock Option Scheme with secondary purchase Stock Appreciation Right
49. Indian Companies offering ESOPs ABB Aditya Birla Nuvo Ltd Axis Bank Ltd Bharti Airtel Ltd Cairn India Ltd Cipla Ltd Colgate Palmolive India Ltd Dabur India Ltd Divi's Laboratories Ltd DLF Ltd Dr.Reddy's Laboratories Ltd Federal Bank Ltd Glenmark Pharmaceuticals Ltd GMR Infrastructure Ltd Godrej Consumer Products Ltd Grasim Industries Ltd HCL HDFC Bank Ltd Hero MotoCorp Ltd Hindalco Industries Ltd Hindustan Unilever Ltd Housing Development Finance Corp. ICICI Bank Ltd Idea Cellular Ltd IDFC Ltd Indusind Bank Ltd Infosys Ltd ITC Ltd Jaiprakash Associates Ltd Jindal Steel And Power Ltd JSW Steel Ltd Kotak Mahindra Bank Ltd Larsen & Toubro Ltd Mahindra and Mahindra Financial Services Ltd Mahindra and Mahindra Ltd Ranbaxy Laboratories Ltd Reliance Capital Ltd Reliance Communications Ltd Reliance Industries Ltd Reliance Power Ltd Shriram Transport Finance Comp Siemens Ltd Tech Mahindra Ltd UltraTech Cement Ltd Wipro Ltd Yes Bank Ltd Zee Entertainment Enterprises Ltd
50. Impact of Employee Stock Ownership Plan on Companies Potential Merits Potential Demerits Dilution: Dilution of EPS if company issues new shares to meet ESOP obligation Valuation: The stock must be valued annually in order to establish the value of the stock for purposes of purchasing, allocating and distributing the stock in case of Employee Stock Option Fiduciary Liability: The plan committee members who administer the equity stock option plan can be held liable if they knowingly participate in improper transaction Availability of Financing: An ESOP can create serious cash-flow issues for a company, if a company borrows money to fund an ESOP, it will have to allocate significant future earnings towards repayment Employee Loyalty: The company gains employees’ goodwill, loyalty and commitment Employee Retention: Employee turnover rate is greatly reduced Tax Benefits: Provides tax-favored corporate financing
51. Impact of ESOPs on Employees Potential Merits Potential Demerits Greater Participation: Employees gains greater participation in the company Potential Benefits: Creates higher pay and benefits Tax Benefits Downside Exposure: If the value of company does not increase, the employees will lose their potential benefit in case of ESPP Exposure to the fund availability of the company in case of re-purchase. In financially difficult times, a large shareholder can frequently be asked to accept a deferred payment plan instead of cash out Compensation Disparity: An individual employee is dependent on the collective output of all employees and management for a bonus Long term Horizon: Particularly attractive to long- term employees
52. ESOPs- Trends in Indian Market ESOP is predominantly the most preferred stock based compensation plan amongst Indian companies ESOP policy is relatively more popular among IT sector companies followed by financial services and manufacturing Multi-national companies consider ESOPs as a key mode of incentivizing their employees and usually have a well structured ESOP policy Large conglomerates usually have a uniform ESOP policies across their businesses None of the companies belonging to TATA group offer ESOPs Most of the Reliance businesses follow similar ESOP policies
53. Equity Linked Notes vs. Employee Stock Options (ESOPs)
54. What are Equity Linked Notes (ELNs)? Equity Linked Notes combine the feature of passive fixed income and active equity linked products. ELD is a zero coupon bond, whose principal re-payment at maturity fulfills the capital guarantee. The initial discount to par is used to fund the equity linked payoff. Working of ELNs An equity-linked debenture can be thought of as a combination of a zero-coupon bond and an equity option ELNs also offer an option of customizing the equity linked payoff on the basis of investor’s requirement
55. Price determinants of Equity Linked Notes Equity Spot Level: The most important determinant of the option price. Payoff of an ELN is directly linked to the spot price, increase in the equity price makes the option more expensive. Interest Rate Level: Interest rates affect the price of both options and bonds. Higher the interest rates, larger is the initial discount to par and more is available to spend on the equity option. Dividend Yield: High dividend yield pulls down the forward, making the upside cheaper. Cheaper upside leads to the higher participation in payoff. Volatility: Volatility is a key driver of option pricing. Higher the volatility, usually more expensive will be the option and lower will be the participation. Volatility Skew: Volatility skew is the variation of implied volatilities with respect to the strike price of the option. Out-of-money options are quoted with the implied volatility smaller than those of at-the-money options and the opposite is true for in-the-money options 1 2 3 4 5
56. Product Idea ELN for Employee Stock Option ELN for Employee Stock Purchase Plan Start: Company Company INR 100 INR 100 INR 100 Employee Maturity: Company Company INR 100 + Equity Upside INR 100 + Equity Upside Equity Upside INR 100 + Equity Upside Employee Employee
57. Equity Linked Notes Asian Call Option Tenor(T): 3 years Capital Protection: 100% S[0]: Closing price of the stock on the Start Date S[T]: Average of closing price of the stock on annual observation dates PF: Participation in the upside Payoff: At maturity Citibank pays : (1+ PF * Max(0, S[T]/S[0]-1)*Notional Invested
58. Equity Linked Notes vs ESOPs Potential Merits over ESOPs Potential Demerits over ESOPs Capital Guarantee: Employee exposed to only the upside of the stock Diversification: Significant potential of diversifying both in terms of underlying and the payoff profile in case of ELNs No Dilution: Nodilution of EPS due to issuance of new shares No Valuation Required: No need to value the stock annually to meet ESOP obligations No Liquidity: No liquidity crisis as in the case of purchase of shares under ESOP policy No Legal obligation: NoIssue of fiduciary liability Credit Risk: Company is exposed to the Issuer risk of Citibank for principal re-payment Tax: No significant tax benefits in case of ELNs Cost: Costlier than ESOPs in some cases
59. F&O Liquidity Analysis of Companies with ESOP policy Given the low liquidity of long tenor options in Indian F&O market, Citibank can issue ELNs for following highlighted companies Liquidity  Liquidity  Liquidity 
60. Example: HUL Employee Stock Option Scheme
61. ELN on Hindustan Unilever Limited (HINDUNILVR) Asian Call Option Participation on Upside 1:1 participation in the upside Tenor(T): 3 years Capital Protection: 100% S[0]: Closing price of the stock on the Start Date S[T]: Average of closing price of the stock on annual observation dates PF: Participation in the upside Payoff: At maturity Citibank pays (1+ PF * Max(100%, S[T]/S[0]))* Notional Invested Underlying: HINDUNILVR Strike: 100% Tenor: 3years Participation(PF) = 105% Asian Call Option allows buyer to capture market upside on annual observation dates as in the case of ESOPs
62. ESPP and ELN Performance Comparison Company: Hindustan Unilever Limited Spot Price: Rs 563.00 Date: May 2014 Employee XYZ receives compensation worth Rs 10 lakhs in the form of stock based compensation. ESPP Equity Linked Notes
63. Scenario Analysis # 1A Bearish Market Start Date[0]: May 2014 Stock Price [0]: Rs 563.00 Maturity[T]: May 2017 Stock Price[T]: Rs 506 Payoff Comparison * In case stock depreciation, employee ends up losing his capital in ESPP while in ELN his capital is protected
64. Scenario Analysis # 1B Bullish Market Start Date[0]: May 2014 Stock Price [0]: Rs 563.00 Maturity[T]: May 2017 Stock Price[T]: Rs 619.00 Payoff Comparison * In case of stock appreciation both ELN and ESPP yield same returns
65. Exercise Flexibility European Exercise/ High participation American Exercise/ Low Participation ELN ESOP Bermudan Call Monthly/Quarterly/ Annual Observation Citi Markets equity desk can offer Shout Options to give flexibility to lock in the equity payoff when employees want to exercise European Call American Call High Exercise Flexibility Low Exercise Flexibility
66. Annexure I Considerations of Employee Stock Ownership Plan
67. Design Consideration of Employee Stock Ownership Plans Option valuation method Taxation Vesting Schedule Exercise Price Exercise Period Legal and Regulatory Framework Frequency of Issuance Quantum of options 1 2 3 4 5 6 7 8
68. Option valuation method 1 Option 1: Intrinsic Value Method Option 2: Fair Value Method Intrinsic Value = Max( Equity Price –Exercise Price) Commonly used method for accounting purpose Fair Value = Amount for which the option can be exchanged between knowledgeable, willing parties in an arms length transaction Computed using an option-pricing model like Black Scholes, Binomial valuation methods Required for disclosure and accounting purposes Taxation 2 Tax impact on employees Tax impact on Company Perquisite at the time of exercise: Amount of FMV at the time of exercise less the exercise price is taxed Capital gain at the time of sale of shares: Net sales consideration lessFMV as on date of exercise is taxed Long or short term capital gain would depend on period of holding of the asset Company is responsible for Tax Deduction at Source (TDS) on the perquisite value of ESOPs
69. Vesting Schedule 3 Vesting period is the time period during which vesting of the option granted to the employee takes place Two common vesting schedules are- Graded vesting is a type of vesting in which employees receive a certain percentage of vesting after each year of service.  Cliff vesting is another type of vesting in which the company will set a time limit that must be reached by the employee before becoming fully vested Most of the companies in India prefer graded vesting schedule over cliff vesting. Graded vesting in equal ratios over a period of 4 years is the most commonly used schedule.
70. Vesting Grade Schedule Contd. 3 Source: Company Annual Reports
71. Exercise Period 4 Exercise Period It is the time period after vesting within which the employee should exercise his right to apply for shares Most commonly observed exercise period in Indian context is 5 years Source: Company Annual Reports
72. Exercise Price 5 It is the price payable by the employee to exercise the option Exercise price is either equal to or less than the fair equity price of the stock at the time of issuance Quantum of Options 6 The size of ESOPs is negotiated by management, investors and existing shareholders as the stock option pool represents a potential dilution (i.e., reduction in ownership) for all of these groups. Legal and Regulatory Framework 7 SEBI (ESOP guideline) Companies Act Income Tax Act Accounting guidelines ( ICAI, IFRS, US GAAP) Foreign Exchange Management Act (FEMA)
73. Annexure II Possible Equity Linked Payoffs
74. Equity Linked Payoffs 1. Asian Call Option N: Notional Invested Tenor(T): 3 years Capital Protection: 100% S[0]: Closing price of the stock on the Start Date S[T]: Average of closing stock price on annual observation dates (total 3 observations) PF: Participation on the upside Payoff: At maturity Citibank pays (1 + PF * Max(0, S[T]/S[0]-1))*N
75. Equity Linked Payoffs 2. Geared Call Spread N: Notional Invested Tenor(T): 3 years Capital Protection: 100% S[0]: Closing price of the stock on the Start Date S[T]: Closing price of the stock on the Expiry Date PF: Participation on the upside= 200% Cap: XXX Payoff: At maturity Citibank pays Min( Cap, Max[1, 1 + PF* (S[T]/S[0]-1)]*N
76. Equity Linked Payoffs 3. Digital Option N: Notional Invested Tenor(T): 3 years Capital Protection: 100% S[0]: Closing price of the stock on the Start Date S[T]: Closing price of the stock on the Expiry Date Barrier: 100% Bonus: XXX Payoff: If at maturity S[T] is above the barrier, client gets (1+ Bonus)*N, else N
77. Equity Linked Payoffs 4. Up and Out Call with Rebate N: Notional Invested Tenor(T): 3 years Capital Protection: 100% S[0]: Closing price of the stock on the Start Date S[T]: Closing price of the stock on the Expiry Date Barrier: XXX Rebate: XXX % Payoff: If S[T] is below the Barrier, the client gets Max(100%, S[T]/S[0])*N, else client gets (1 + Rebate)*N
78. 3. Analyzer for FDI, ODI and ECB data
79. Data Analyzer ECB Information about the External Commercial Borrowing of any company can be found out with the following details Start Date Maturity Amount Invested Purpose FDI Following information about the FDI can be found out Month and Year of the investment Amount Invested Foreign Company Indian Company of Investment
80. Data Analyzer ODI Following information about the ODI can be found Month and Year of the Investment Amount Invested Name of the Indian Investor Company of the Investment Overseas Country of the Investment
81. Data Analyzer
82. Blue Wave divider
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95. Our color palette Core palette White Ocean Dark gray Light gray Citi blue Cyan Tangerine Plum R 255 G 170 B 17 R 0 G 140 B 230 R 255 G 255 B 255 R 137 G 12 B 88 R 83 G 86 B 90 R 151 G 153 B 155 R 0 G 45 B 114 R 0 G 189 B 242 Additional Accent Colors (Use only as necessary, after you have run out of colors in the core color palette) Fuschia Lavender Aqua Green Lime Yellow R 255 G 205 B 0 R 198 G 0 B 126 R 160 G 94 B 181 R 0 G 176 B 185 R 132 G 189 B 0 R 196 G 214 B 0 Purple Teal Forest Olive Goldenrod Burnt orange R 203 G 96 B 21 R 107 G 48 B 119 R 0 G 115 B 119 R 0 G 132 B 61 R 148 G 147 B 0 R 201 G 151 B 0
96. Additional resources For quick tips on how to make the most of this template, please refer to the ‘Citi Brand How-To’s: Using the enterprise PowerPoint template’ guide, which is available on Brand Central (brandcentral.citi.com). Log in currently uses your Single Sign-On (SSO) account.
97. Citi Enterprise PowerPoint TemplateSubtitle goes here Template includes: Page options for both cover and content, remove all that are not applicable Place holder notes and imagery, remove all before presenting Confidentiality classifications, select one that best reflects your document content, and remove others within the cover and slide master pages First Presenter Name, Second Presenter Name Month 00, 2014 Business name only Information Classification (choose one): [Public] [Internal] [Confidential] [Restricted]
98. Citi Enterprise PowerPoint Template Subtitle goes here First Presenter Name, Second Presenter Name Month 00, 2014 Business name only Information Classification (choose one): [Public] [Internal] [Confidential] [Restricted]