Trouble is brewing at the Equity Group Holdings Limited owned Equity Bank over the controversial Employee Share Ownership Plan (Esop) amid allegations of fraudulent allocation to a selected few managers and illegal deductions.
Investigations by The Informer Media Group established that the bank staff members have since staged silent boycott against the reward scheme citing irregular deductions on bonus Esop shares and alleged undeserved allocation to some senior managers.
When contacted for comment over the ongoing Esop impasse and staff boycott against the reward scheme, Equity Bank Group Managing Director and Chief Executive Officer (CEO) James Mwangi remained tight lipped.
“Most of the bank employees are boycotting ESOP scheme since the bank deduct money from employees for shares acquired on bonus position instead of swapping shares equivalent to the amount of the bonus earned. Secondly, if one has earned shares on bonus position, if he or she quit or upon untimely demise, at times, the same is not declared to the next of kin. Some senior managers allocate themselves fraudulently.” An impeccable source privy with the goings on intimated.
Equity Bank introduced Esop in 2005, a type of employee benefit plan intended to motivate employees through ownership of the company.
In 2018, the High Court ordered Equity Bank to pay a former employee Samuel Gachie Kamiti nearly Sh79million, which was part of the cash he was to receive after leaving the lender’s Employee Share Ownership Plan in 2010.
The ruling opened doors for other former Esop members who may have also forfeited cash after the bank applied a contested law.
Subsequently, in 2019, a year later, Equity Group investors rejected plans to allocate workers at the institution an additional 205 million shares worth Sh8.6billion to its employees through the Employee Share Ownership (ESOP).
However, in June last year, the CEO announced intended resumption of Esop reward plan to employees in a bid to attract and retain its employees after dropping plans for such a scheme for three years.
“Worse still, the bank acquires the shares at a rate of the purchase price instead of the prevailing market share price.” Our source added.
In the suit filed by Kamiti, he claimed he had invested in shares that would have seen him walk away with Sh103,274,010 at the time of leaving in 2010 but the bank refunded him only Sh24,330,000 through a credit transfer into his account.
In his ruling, High Court judge Francis Tuiyot faulted the bank and the trustees for changing the rules governing Esop which effectively cut Kamiti’s entitlement without informing him in advance.
Under the amended rules he could not get market value for his units if he resigned from the bank. The lender and trustees were well aware that the decision he was making to leave the company would have a huge impact on his investment in the units.
“The bank and trustees did not advise him on the implication. They were at the very least cynical. They watched a unitholder make a decision that would substantially reduce the value of his redemption without telling him that the rules have changed.” Justice Tuiyot ruled.
The judge said the trustees failed to act in the best interest of Kamiti and watched him make a decision that was obviously detrimental to his interest.
“This is not how responsible and well-meaning trustees ought to act.” The judge observed adding that the deed of variation was invalid.
The bank had explained that the variation was necessary to advance retention of employees and that it had been agreed upon the inception of Esop.
The variation had the effect of wiping out part of the accrued value of any unit holder’s rights who ceased to be employed before a certain duration.
Justice Tuiyot, upon evaluating the evidence before the court, concluded that the deed of variation had not been approved by March 2, 2010, when Kamiti resigned and sought to redeem his units.
“As there is no evidence that the deed of variation was submitted to the Authority and approved before March 2, 2010, the terms, therefore, could not be effected as against Kamiti.” The judge noted.
There was evidence that one unit in the ESOP was equivalent to one share in Equity Bank.
Over time, Kamiti purchased 6,557,080 Esop units, which was translated to 6,557,080 shares in the bank.
As at the close of business on March 2, 2010, one share of Equity Bank traded at the Nairobi Stock Exchange at Sh15.75.
“We have been consulting the shareholders on an employee share ownership scheme so that as employees work for investors and shareholders they will be working for themselves… I want to appreciate the shareholders who have given us insights as to how to structure that share ownership scheme that meets the aspiration of employees.” Mwangi said last year during the bank’s18 Annual General Meeting (AGM).
Esops are offered as part of a long-term remuneration mechanism.
Equity Group whose total number of employees stood at 7,688 as of December 2021 said in its latest annual report that its employees held 106,225,400 shares equivalent to 2.81 per cent of the issued share capital of the company which was then valued at Sh4.23 billion.
In 2021, Equity Bank suffered a blow after the High Court allowed Kenya Revenue Authority to collect Sh234 million tax claim against it.
Justice David Majanja dismissed the appeal filed by the bank, saying the conclusions reached by the Tax Appeal Tribunal are reasonable.
The bank had appealed against a judgment of the tribunal that upheld KRA’s decision to charge the Bank PAYE on Employee Stock Ownership Plan (ESOP).
Equity Bank lost an appeal it had filed against judgement of the Tribunal delivered on December 19, 2019 upholding the KRA’s move.
“I do not find any reason to interfere with the tribunal’s decision in each instance as the conclusions reached were within the law,” Justice Majanja said.
KRA had carried out a tax compliance audit of the bank’s records with regard to corporation tax for the year of income 2015, excise duty for the period covering August 2013 to December 2015 and PAYE taxes for the year of income 2016.
It issued an assessment on June 21, 2017 for Sh1.7 billion inclusive of penalties and interest being Sh346,147,520 on account of corporation tax, Sh234,138,308.00 PAYE and Sh1,158,683,449 excise duty.
Equity objected to the assessment and lodged its appeal.
KRA had argued that the bank operates an ESOP where employees are given an opportunity to acquire the bank’s shares at discounted prices.
Eligible employees are invited to take up offers when they are opened and that the shares allocated and taken up are held for a period of five years after which the same are vested in eligible staff.
According to the Income Tax Act, if the employee opts to exercise that option, a taxable benefit is conferred similar to any other employment benefit as access to the benefit is only granted as a result of one’s employment thus can only be classified as a benefit of employment and is then subject to PAYE.
The High Court, in upholding the judgement of the Tribunal agreed with KRA’s submissions that the ESOP confers a benefit to an employee and the benefit to the employee arises from the fact that value of shares, whether or not they are issued at a discount, would ordinarily appreciate at the time of vesting. The appreciation in value is the benefit to the employee that is taxed.
“I find and hold that the tribunal did not err in concluding that Equity, as an employer, should deduct and remit to the commissioner tax on staff benefits under Section 37 of the ITA. It, therefore, made the correct finding that Equity Bank is liable for PAYE on the ESOP benefit to its employees.” Justice Majanja ruled.
