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Sri Lanka investors warned to be more vigilant of ESOPs

COLOMBO (EconomyNext) – Sri Lankan investors should be more vigilant about Employee Stock Ownership Plans (ESOP) given by listed firms as some might be too narrow in scope, a forum for minority shareholders was told.

Naomal Goonewardena, a Partner at Nithya Partners, a law firm, said that in recent years the
regulatory environment for listed firms has improved with better protection for minority interests.

But minority shareholders themselves should exercise greater vigilance over the companies they invest in, he told a forum for retail investors on minority shareholder rights held by the Colombo Stock Exchange in association with the Institute of Chartered Accountants of Sri Lanka and The Chartered Financial Analysts Society of Sri Lanka.

The issue of shares can significantly dilute certain minority shareholders if the majority has unfettered discretion in their issue, Goonewardena said.

But the new company law has introduced the right of pre-emption, an important safeguard which ensures that if new shares are issued, shareholders are entitled to be offered to buy them, which he described as "the first step in protecting shareholder rights in general."

But he also warned in the case of some Employee Stock Ownership Plans there could be abuse.

"I’m amazed a lot more ESOPs are not challenged by minority shareholders, given their narrow scope," Goonewardena said. "Sometimes just 10 people in the organisation get the benefit."
This can result in the organisation itself not performing well "but I never see shareholders objecting," he said.

ESOPs are matters minority shareholders should be more "proactive on", he added.

ESOPs in public firms are meant to motivate employees by giving them a stake in the company, to perform better so that the company does better.

They are usually tied to performance indicators such as meeting or exceeding profit targets and returns on capital.
ESOPs also provide tax benefits to the sponsoring company or selling shareholder and participants but can also dilute the stock of existing owners.






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