Paytm Show Cause Notice: Rs 1,100 Crore ESOP Plan At The Heart Of SEBI, RBI Scrutiny

The nomination and remuneration committee of One97 Communications approved a grant of 2.1 crore shares in financial year 2022 to its Managing Director and Chief Executive Office Vijay Shekhar Sharma. This grant valued at over Rs 1,100 crore at the current market price is at the centre of scrutiny and investigation by the country's two regulators - SEBI and RBI.

The issue, initially flagged by investor advisory firms, has led to the market regulator issuing a show cause notice to the company over violation of SEBI's Share Based Employee Benefits and Seat Equity Regulations 2021.

The guidelines clearly state that stock option cannot be granted to an employee who is a promoter or belonging to the promoter group or to a director who either himself or through a relative or through any body corporate, directly or indirectly holds more than 10% of ‘outstanding shares’ of the company.

As per the shareholding available at the end of June 2024, Vijay Shekhar Sharma holds a 9.1% direct stake in the company. He also holds a 4.87% stake through a trust managed by Axis Trustee and also controls 10.27% of stake through Resilient Asset Management BV in agreement with Antfin (Netherlands) Holding BV.

The off-market transfer is a no-cash deal with economic rights held by the Chinese investor.

Anfin will transfer the stake to Resilient Asset Management in lieu it will get debt instrument OCDs i.e. optionally convertible debentures. The Dutch arm is a 100% owned overseas entity of Vijay Shekhar Sharma.

If Shekhar controls the outstanding shares of Trust and Dutch co, he will violate the ESOP regulations and if he doesn’t control the outstanding shares held by the Dutch company, then the beneficial ownership will be with a Chinese company making it difficult to get the nod for the FDI investment for his company arm, Paytm Payment Services. The Antfin restructuring helped him get government's nod for FDI investment and is pending before the banking regulator for the approval.

Sharma directly and indirectly owns 24.24% of One97 Communications. The regulator will look at the rights that Sharma enjoys as a director along with outstanding shares that he holds directly and indirectly in the company.

One 97 filed a fresh application with the banking regulator for aggregator license, and RBI would have shared the disclosure with respect to all direct and indirect outstanding shares (equity) that Sharma held in the fintech company.

The company disclosed during its quarterly earnings that it has obtained legal opinion on the issue and is compliant with the regulations. But the regulator’s scrutiny is unlikely to be based on legal opinion but the extant regulation on this issue.

The market regulator can reverse the grant of these options, said Sanjay Asher, Senior Partner at Crawford Bailey & Co to NDTV Profit, adding that these options are yet to be exercised. If Sharma exercises these options, then it would be complicated route to cancel equity and this allotment.  

Sharma was granted 2.1 crore stock options on Sept. 7, 2021, at an exercise price of Rs 9 per share.

The SEBI show cause notice has complicated Paytm’s recovery from the set back of the Payments Bank debacle.

Paytm has lost nearly 75% of its value since its IPO which was priced at Rs 2,150 apiece.