Issuer’s option — what is it?

   For those who are familiar with such a financial instrument as an option, the term “issuer’s option” will also be understandable. In general, it does not differ much from the usual understanding of this security, except for several nuances. An issuer’s option is a registered security; it is issued only by joint-stock companies and is regulated by the state.

 

What is an issuer’s option?

  This is the name given to an issued security that grants its holder the right to exchange the option for company shares within a specified period at a pre-agreed price. Essentially, it is an exchange-traded call option, since, like it, it gives its holder the right to purchase an asset (in this case, company shares) in the future at a price agreed at the time of issuance. Sometimes the option also specifies conditions, for example, the holder may convert the security into shares only if, during the reporting period, their price increases relative to the amount stated in the contract.
  An issuer is an organization that issues securities for the purpose of its development. Most often, the issuer is a large joint-stock company. Among well-known Russian companies that issue such instruments are MTS, RusHydro, VimpelCom, and others. 

What are issuer’s options used for?

  This type of security is not very common. This is because only large joint-stock companies issue them, which creates certain difficulties for buyers. They cannot choose the underlying asset or the term of the instrument, as these parameters are already regulated. Therefore, issuer’s options cannot be used as a tool for making money on the stock market.
  The issuer independently decides when to issue options. As a rule, this happens during periods of financial stability of the company. The firm is confident that its shares will not rise sharply in the near future, and therefore it will not suffer losses from selling shares at the price fixed in the option at that time.
  As a result, an issuer’s option is a completely uninteresting object for traders. Successful stock market players do not engage in buying and selling such options, since the chance of making a profit from them is minimal. So who are these securities issued for?
  In practice, such instruments have become an excellent tool for labor motivation. Companies give them to their employees as bonuses. The condition for converting the option is an increase in the company’s share price in the near term.
  The employee is interested in the company becoming even more profitable and begins to diligently fulfill his duties. HR managers achieve even greater dedication from their subordinates by constantly reminding them that the efficient work of just one employee can affect the success of the entire company. As a result, a person works tirelessly throughout the specified period, but in most cases receives nothing: the share price does not rise, and the option becomes a useless piece of paper.
  Despite the fact that this method has been used for a long time and its main secret is known to almost everyone, the popularity of such securities among issuer employees does not decline, because the stakes are too high. With a successful outcome, an ordinary worker can become a shareholder — even if only a small one, but part of the company’s top tier. He will be able to receive dividends or sell the acquired shares, making a good profit.

State control over the issuance of issuer’s options

  An issuer’s option is an issued security that is created only by joint-stock companies. This means that the circulation of this instrument is controlled not only by the Federal Service for Financial Markets, but also by bodies supervising the activities of joint-stock companies.
  All stages of issuing an option are regulated at the legislative level:
  1) The decision to issue the instrument must be made at a meeting of the board of directors.
  2) Before issuance, options must be registered with the Federal Service for Financial Markets.
  3) After completion of placement, a report on the sale (or free transfer) of securities is submitted to the relevant authority.
  4) A company has the right to issue options only after full payment of its authorized capital.
  5) The number of issued securities must not exceed the number of free shares.
  6) The number of shares that may be issued upon conversion of the options must not exceed 5% of the issuer’s authorized capital.
  7) The option holder has the right not to exercise it. A joint-stock company cannot insist on its execution.
  If at least one of these rules is violated, the joint-stock company may be fined. In case of more serious violations, the options are annulled. The expenses incurred by security holders are reimbursed at the company’s expense.