The Securities and Exchange Board of India (Sebi) has issued show-cause notices to Vijay Shekhar Sharma, founder of One 97 Communications Ltd (Paytm’s parent), and board members who served during its initial public offering in November 2021 for alleged misrepresentation of facts, two people with direct knowledge of the matter said.
The notices pertain to Sharma’s alleged non-compliance with promoter classification norms. The probe was initiated based on inputs from the Reserve Bank of India (RBI), which had examined Paytm Payments Bank earlier this year, the people cited above said.
At the heart of the matter is whether Sharma should have been classified as a promoter, given that he had management control rather than an employee while filing the IPO documents. Consequently, Sebi also issued show-cause notices to the company’s directors at that time, questioning them for endorsing Sharma’s stance, the people said.
Sharma would have been ineligible for employee stock options (ESOPs) after the listing as Sebi regulations prohibit promoters from receiving ESOPs post-IPO, according to the people cited above.
In a stock exchange filing made on Monday evening Paytm said “We would like to inform you that this is not a new development, as the Company had already made relevant disclosures on this matter in its financial results for the quarter and year ended March 31, 2024, as well as the quarter ended June 30, 2024. The Company is in regular communication with the Securities Exchange Board of India (SEBI) and making necessary representations regarding this matter. Accordingly, there is no impact on the financial results for previous quarters ended June 30, 2024, and March 31, 2024, respectively.”
Emails sent to spokespeople for Sebi, One 97 Communications and directors who served on the board during its IPO remained unanswered.
“Sebi is taking the view that Sharma should have been classified as a promoter, and it was also the fiduciary duty of board members of the company to verify the accuracy of the claims made by the founder and attest the same,” said one of the persons cited above.
“Although Sebi has gone after directors of a company in the past, they have been mostly cases of financial fraud. This is one of the rare cases where Sebi is trying to hold the directors responsible for a potential compliance lapse, which was also not pointed out either by bankers or statutory auditors.”
Unless a company classifies itself as ‘professionally managed’, all listed companies are normally assumed to be promoter driven. For a company to be eligible for being categorised as professionally managed, none of its shareholders should have more than a 10 percent stake, and no single shareholder should be wielding control.
In Paytm’s case, prior to filing the IPO document, Sharma transferred 5 percent of his shareholding to a family trust named VSS Holdings Trust. Prior to this transfer, Sharma held 14.6 percent of One 97 Communication and after the transfer, the shareholding of Sharma came down to 9.6% -- just below the 10% threshold specified in the rules.
Additionally, Sharma was exerting a certain amount of control by being on the company’s board and in charge of running the company.
According to the offer document, VSS Holdings Trust is fully owned by Sharma. However, in previous media statements, the company has maintained that Sharma has no control over the 5 percent shareholding held by the trust.
“A key issue in the case is that Sebi has initiated action three years after the listing. Sebi had known about the shareholding arrangement ever since the offer document was filed in 2021. In fact, subsequently, proxy advisory firms have also red-flagged the issue. However, Sebi initiated action only after the Paytm Payments Bank saga,” another person cited above said.
In August 2023, Sharma agreed to purchase a 10.3 percent stake in the company from Antfin Holdings (Netherlands). Sharma purchased this stake through Resilient Asset Management BV, which is owned by Sharma. Normally, if the same person holds stakes in a company through different entities, all the stakes are clubbed together to ascertain if the person is a promoter.
However, in the current case, the stake owned through Resilient Asset Management has been classified under ‘Foreign Direct Investment’, the June 2024 shareholding pattern of the company showed.
The practice adopted by Paytm diverges from some other professionally run companies such as HDFC Bank and Larsen & Toubro, which are professionally managed with no promoters and are overseen by a shareholder-appointed board.
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