Paytm’s ESOP Scheme Stock Options To Founders Under SEBI Scanner - Resolut Partners

Paytm’s ESOP Scheme Stock Options To Founders Under SEBI Scanner

Authors: Shreejith R & Payaswini Upadhyay

What?

Just prior to its listing in 2021, Paytm called a shareholder vote to approve removal of its founder Vijay Shekhar Sharma as promoter

Paytm then granted Sharma 21 million stock options – which it couldn’t have if he was classified as a promoter

This sequence of events, where companies remove founders as promoters and then grant them large stock options just before listing, has also been seen in other new age tech companies such as Zomato

SEBI has served a show cause notice to Paytm for a potential violation of listing regulations in relation to the grant of stock options to Sharma

Why ?

Founders are usually allotted stock options before listing to incentivize them during this crucial period, especially since their stakes typically get diluted significantly due to various rounds of fundraising

Crucially, under Indian law – promoters (simply the “person in control”) cannot be allotted stock options. Since most founders are already classified as “promoters”, companies may try to declassify them and then grant stock options. The law, however, requires persons in control to be classified as promoters (this is not optional)

While founders can be incentivised through other equity-linked schemes, such as sweat equity, they are not as attractive as stock options due to

  1. Illiquidity – shares are locked-in for 6 months after trading approval. This leads to a tax funding risk since promoters cannot sell these shares to fund their tax bills (which are calculated on the date the shares are received). On the other hand, shares allotted via stock options can be sold as soon as they are credited;

  2. Approval risk – sweat equity grants have to be approved by shareholders every year, which brings in uncertainty. Founders face the risk of volatile short-term trends influencing shareholders

Another advantage of not being a promoter – existing shares (up to 20% stake) are locked in for 18 months post-IPO, against a lower 6-month lock-in for non-promoters

Bottom Line

Founder incentivization for IPO-bound companies may have to be rethought. While regulatory apprehension of ESOPs being used to divert value to promoters is fair – this can be tackled better by making such grants subject entirely to public shareholders approval rather than tying the hands of companies.

Such share based incentivisation is crucial in retaining founders who drive the business and create value for all shareholders; and is effectively and routinely deployed by companies around the world

SEBI has reportedly asked companies who have filed for IPOs to classify founders with a 10% stake as promoters

Exchanges have also reportedly notified bankers that founders who hold executive positions should be classified as promoters if they hold a 10% stake (on their own or with other founders)

Curiously, IPO-bound Swiggy has not classified its founders (including the CEO) as “promoters” while also granting them substantial amount of ESOPs.

But the company’s DRHP has been publicised after initial review by the regulator suggesting SEBI may be comfortable with these facts. It may be helpful if SEBI can come out with clear criteria for when founder-CEOs should be classified as “promoters” to avoid any confusion in the market.

Recent Research

Amendments To InvIT Voting Thresholds
Part 1: CCI approval for minority PIPE deals – to file or not to file?
Paytm's ESOP Scheme Stock Options To Founders Under SEBI Scanner
India’s New Global M&A Flavour: Cash-free M&A, SPACs, Roll-ups now possible?
Amendments To InvIT Voting Thresholds
1 2 3 73

Leave a Comment

Your email address will not be published. Required fields are marked *

Register Now