The Securities and Exchange Board of India (SEBI) has issued show-cause notices to Vijay Shekhar Sharma, founder of Paytm, and other board members involved during the company’s November 2021 IPO. These notices, as reported by Reuters via Moneycontrol, accuse them of misrepresenting facts and failing to comply with shareholder classification norms.
The primary issue is whether Sharma should have been classified as a large shareholder instead of an employee, which would have impacted his eligibility for Employee Stock Ownership Plans (ESOPs). SEBI has questioned the decision by directors at the time to support Sharma’s classification as an employee rather than a large shareholder. This misclassification allegedly allowed Sharma to receive stock options despite owning a significant stake in the company.
SEBI is reportedly considering changing its regulations to address the broader issue of founders and their families in tech startups owning shares under ESOPs. The regulator is concerned that founders with significant influence and rights, often classified as promoters, should not benefit from stock options if they hold a considerable stake in the company.
A key aspect of the controversy involves Sharma’s reduction of his stake from 14.7% to 9.1% before the IPO by transferring 30.97 million shares to Axis Trustee Services on behalf of the Sharma family trust. This move allowed Sharma to qualify for ESOPs since shareholders with more than a 10% stake in a publicly listed company are ineligible for stock options.
In the wake of these reports, Paytm’s shares dropped by up to 8.9%. Both SEBI and Paytm have declined to comment on the matter.
