Vijay Shekhar Sharma is Paytm’s founder and synonymous with the company. Independent of the significant erosion in the stock price since IPO, we recognize that the company has improved performance in the 1H23. Our question on whether Vijay Shekhar Sharma is eligible for stock options is neither driven by the company’s (financial or stock price) 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.

There are two issues that SEBI needs to validate to establish if Vijay Shekhar Sharma is eligible to receive stock options: (a) Does he meet the definition of promoter as defined under SEBI ICDR Regulations? (b) Is his aggregate shareholding less than 10% - direct and indirect? The test of being a promoter is not limited to simply being classified as one in the offer document. The definition of promoter under SEBI ICDR Regulations also tests for control, where control has a broad definition, and if the board is accustomed to act on the advice, directions, and instructions of the founder. These tests are not one time tests to be administered at the time of the IPO, but those that the regulator must run periodically.

According to Paytm’s Article 113 of its Articles of Association (AoA) (Exhibit 2), Vijay Shekhar Sharma gets a board seat if: (a) he holds 3,100,000 shares (which shall not be less than 2.5% of the issued and subscribed share capital on a fully diluted basis), or (b) he continues to hold an executive position in One 97 Communications Limited If Vijay Shekhar Sharma meets both conditions, he can nominate himself or another person to the board. If he meets only one of the two conditions, he cannot nominate anyone else, but can continue on Paytm’s board.

The shareholding threshold of 2.5% is low, especially when regulations have a 10% shareholding threshold for shareholders to convene an EGM, propose a resolution, or file for oppression and mismanagement. According to Article 113(b) of Paytm’s AoA, even the private equity firms invested in the business (API, SVF, and / or SAIF) get a board seat only if they maintain a shareholding of at least 10%.

Currently, Vijay Shekhar Sharma is a non-retiring director on Paytm’s board. While his reappointment as Managing Director will require shareholder approval after five years, in IiAS’ opinion, he could have board permanency if he decides to let go of his executive role and become a non-executive director.

These provisions and structures give Vijay Shekhar Sharma ‘entrenchment’ similar to that enjoyed by promoter families in the more traditional companies.

The red herring prospectus shows that before the IPO, Vijay Shekhar Sharma reduced by direct equity holding by 30.97 mn shares, and Axis Trustee Services Limited acting on behalf of the Sharma Family Trust acquired 30.97 mn share of the company’s equity. As a result, his direct equity shareholding at the time of the IPO reduced to 9.1% (well below his 14.7% equity a year ago). In its current construct, Paytm’s buyback will continue to keep Vijay Shekhar Sharma’s direct equity stake below 10%, even if the shares are bought at the current market price (which is considerably lower than the maximum buyback price of Rs. 810).

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 set out in both, under Indian regulations and Paytm’s ESOP scheme. While considering this, SEBI may ask itself the following two questions:
• In most instances, we see family trusts being classified as part of the promoter group. Given this context, if Vijay Shekhar Sharma classified himself as a promoter, will the 4.7% equity held by Axis Trustee Services Limited on behalf of Sharma Family Trust be classified as a public shareholder? • If Vijay Shekhar Sharma increases his equity stake to 22%, with the family trust holding the aggregate equity would cross 26%, which is the threshold for an open offer. Will SEBI then consider only his direct holding and allow him not to trigger an open offer? In IiAS’ opinion, it appears that several founders may be playing the regulatory arbitrage between the rights akin to a promoter versus the financial gains of not being classified as one. Regulations need to catch up to these structures.

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