IiAS Questions Paytm Founder Vijay Shekhar Sharma's ESOPs, Seeks Clarity From SEBI

A proxy advisory firm has raised questions on Paytm founder Vijay Shekhar Sharma’s stake in the parent firm One97 Communications Ltd., as well as the employee stock options granted to him by the company ahead of the initial public offering.

Sharma is the founder and chief executive officer of One97 Communications, but is not classified as promoter, according to the stock exchange disclosure. As a non-retiring director, Sharma chairs the company’s board and has the right to a board seat if he holds at least 2.5% stake.

Effectively, he enjoys the rights of a promoter without the responsibilities and restrictions, Institutional Investor Advisory Services Ltd. said in a blog on Friday.

Is he then eligible to receive stock options?

“Our question…is neither driven by the company’s performance nor the quantum of stock options granted to him—it relates to a possible regulatory arbitrage that may need to be bridged by the regulators,” IiAS said in the blog.

When contacted, a Paytm spokesperson said, "The company is fully compliant and has followed all provisions of applicable law for grant of ESOPs, including approval by the shareholders."

"Our founder’s classification as a non-promoter is in accordance with applicable law and due process has been followed."

According to Paytm’s Articles of Association, Sharma gets a board seat if he has 3.1 million shares, equivalent to at least 2.5% stake, of the company and is involved in an executive capacity. He can continue to be on Paytm’s board even if he meets only one condition, IiAS said in its blog.

“The shareholding threshold of 2.5% is low, especially when regulations require at least 10% shareholding to convene an EGM [extraordinary general meeting], propose a resolution, or file for oppression and mismanagement,” IiAS wrote in the blog. “According to Paytm’s AoA, even the private equity firms invested in the business get a board seat only if they maintain a shareholding of at least 10%.”

Therein lies a second concern raised by IiAS.

The Threshold

Paytm’s red herring prospectus shows that before the company’s initial public offering, Sharma reduced his direct equity shareholding in the company by 30.97 million shares. That brought down his stake in the company to 9.1% from 14.7% a year ago. At the same time, Axis Trustee Services Ltd., acting on behalf of the Sharma Family Trust, acquired 30.97 million shares.

According to the BSE disclosure, Sharma owns 8.91% and his Axis Trustee Services Ltd. owns 4.77%—together 13.68%—in the company at the end of September 2022. Both the holdings are classified under the public shareholding category.

If the two stakes are combined, IiAS says, Indian regulations would make him ineligible to receive stock options.

• According to Point 16.3 of SEBI’s Employee Stock Option Scheme and Employee Stock Purchase Scheme Guidelines, 1999, “A director who either by himself or through his relatives or through any body corporate, directly or indirectly holds more than 10% of the outstanding equity shares of the company shall not be eligible to participate in the ESPS.”

IiAS wrote in its blog, "SEBI needs to consider if Vijay Shekhar Sharma’s direct equity and that held on behalf of Sharma Family Trust ought to be aggregated to test for compliance with the 10% threshold.”

The Stock Options

Merely days before the Paytm IPO in November 2021, One97 Communications granted Sharma 21 million stock options at Rs 9 apiece. That aggregates to about Rs 4,000 crore, which is higher than the compensation of all BSE Sensex CEOs put together.

The advisory firm raised issue with the rationale for such a grant which is not clear. “This lack of clarity on what determines variable pay is similar to what is often seen in the compensation disclosures of ‘promoter’ CEOs,” IiAS wrote in the blog.

To be sure, in a letter to shareholders in April 2022, Sharma said his stock options will vest only when Paytm’s “market capitalisation has crossed the IPO level on a sustained basis".

Since then, One97 has announced a Rs 850-crore share buyback, even as the stock languishes 75% below its IPO price.

What Next?

IiAS wants SEBI to ask itself two questions:

• Family trusts are often classified as part of the promoter group. In this context, if Sharma classifies himself as a promoter, will the 4.7% equity held by Axis Trustee Services, on behalf of the Sharma Family Trust, be classified as a public shareholder?

• If Sharma increases his equity stake to 22%, and his family office holding to 4.7% stake, the aggregate shareholding would cross 26%—the threshold for an open offer. Will SEBI then consider only his direct shareholding and stop him from triggering an open offer?