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It is very common for Sephardim to name their children after their parents who are still alive.
There is a Halacha that forbids children to call their parents by their first name.
How can they do this, if inevitably they will call their children's name while in front of their parents?
Although a child may not call his father by name, a child may refer by name to someone else who shares his father's name if the father is not present. If the the father is present, there is a dispute between the Shach and Taz whether this prohibition applies. (Yoreh Deah 240:2, Shach 3, Taz 5)
Sephardi Poskim follow the stricter opinion (which is the simple reading of Rambam) and instruct parents to refer to their child with some appellation (e.g. Avi instead of Avraham) when their parent is present to make it clear that they are referring to their child and not to their parents ( Horav Ben-zion Abba Shaul zt”l quoted in Moreh Horim V’kebudom page 81:footnote 24, and Yalkut Yosef, Kibud Av, end of chapter 5)
At the bris, when referring to the child it is permitted to refer to him by name -- without any change since the parent is honored with having a grandchild with his name and implicitly is not insistent on his normally required honor. (Yalkut Yosef, Kibud Av, 8:8 footnote 8)
Comprehensive Discussion on Referring to Parents by Name In Halachically Speaking
What is observed is that indeed a boy is named (Lashon HaKodesh) after a living grandfather, therefore upholding this Minhag and giving Kavod to the said grandfather, but at the same time, the boy is given a name in La'az (secular, language of the Medina) to avoid this issue of calling the boy when the grandfather is present. The Lashon HaKodesh name would only be used for calling up to the Torah, Ketuba, etc...
