Share-Based Payments (Ind AS 102)

Ind AS 102 (Share-based Payment) ensures that equity compensation paid to employees and other service providers is recognised as a cost in the income statement, not treated as a zero-cost transaction merely because no cash changes hands. This is economically correct: granting options that employees later exercise at below-market prices dilutes existing shareholders, representing a real economic cost.

For equity-settled share-based payments — the dominant form in India through ESOP schemes — the fair value at grant date is measured using an option pricing model. The Black-Scholes-Merton model is most commonly used, requiring inputs: stock price at grant, exercise price, expected life of the option, risk-free rate (typically G-sec yield), expected volatility (computed from historical stock price data), and expected dividend yield. The resulting fair value per option is amortised to P&L on a straight-line basis over the vesting period, with a corresponding credit to share-based payment reserve in equity.

For Indian IT companies — Infosys, Wipro, TCS, and more recently Zomato, Nykaa, Paytm — ESOP expenses form a meaningful component of total employee cost. Infosys disclosed annual ESOP charges of several hundred crore rupees. For new-age technology companies that went public through the 2021 IPO boom, ESOP expenses were often larger than reported operating profits, making EBITDA before ESOP charge a common alternate metric used in investor communications.

SEBI's ESOP guidelines (SEBI Employee Stock Option Scheme regulations) regulate grant, vesting, and exercise mechanics for listed companies. A minimum vesting period of one year applies. SEBI also required disclosure of the dilution impact on EPS from outstanding options. Listed companies disclose ESOP details in the annual report including the number of options outstanding, weighted average exercise prices, weighted average remaining contractual life, and the fair value assumptions used in the option pricing model.

Cash-settled share-based payments (share appreciation rights — SARs) require re-measurement at fair value at each reporting date until settlement, with the liability recognised on the balance sheet. This creates income statement volatility as the liability rises and falls with the stock price, making period comparisons challenging for companies with large outstanding SAR programmes.