Directors nominated by financial institutions are now eligible for employee stock options, provided the director and nominating institutions sign an agreement on this and a copy of it is given to the company.

The Securities and Exchange Board of India on Tuesday made this amendment after it received several cases after a grey area in the regulation led to institutions forbidding nominee-directors from receiving Esops.

However, the joy of the nominee-directors could be short-lived as sources in Life Insurance Corporation and General Insurance Corporation, which have a substantial shareholding in many large Indian companies, said they would not allow nominee-directors to accept Esops since they were government-owned bodies.

A GIC official said no government institution will allow nominee-directors to take Esops. "There will be a clamour to be on the boards of good companies if we allow this," he said.

Before the amendment to the Sebi (Employee Stock Option Scheme and Employee Stock Purchase Scheme) guidelines, 1999, Esops were meant for whole-time directors, employees and officers of an organisation. Exempt categories were promoters or directors with over 10 per cent holding in the company.

Last year, there was a two-month face-off between LIC [Get Quote] and GIC and their nominee directors, B P Deshmukh and Kranti Sinha, on the board of Larsen and Toubro after the nominee-directors refused to return shares allotted to them by the construction major in spite of directions by both the institutions that its nominees should not accept any Esops. Sinha and Deshmukh held 20,000 and 30,000 L&T shares, the market price of which was Rs 3.5 crore and Rs 5 crore, respectively, at the time.

The two financial institutions moved the Bombay High Court to bar their nominee directors from dealing in these shares. Both directors lost their jobs on the L&T board. The matter was later settled out of court after the former directors returned their employee stock option shares to the company. After this, all financial institutions that hold equity stakes in various companies had written to them asking them not to issue Esops to their representatives to avoid a similar situation.

"Granting Esops is important for companies in terms of incentivising directors since companies are trying to create good governance on the board. Companies also need to look at shareholder interest and shareholder expectation. Obviously, the institution nominating the individual to the board should be comfortable with this," said Jamil Khatri, executive director at KPMG.