Paytm's ESOP spend was greater than that of Zomato, Policybazaar, Delhivery, Nykaa combined in Q3

Paytm founder Vijay Shekhar Sharma

In the December quarter (Q3), Paytm's employee stock option (ESOP) spend of Rs 378 crore was more than that of Zomato, Policybazaar, Delhivery, and Nykaa's combined ESOP expenses, even as the crisis-hit fintech was also the only loss-making company of this new-age lot during the quarter, an analysis of their regulatory filings by Moneycontrol showed.

During the quarter, Zomato logged ESOP expenses of Rs 122 crore, Policybazaar Rs 37 crore, Delhivery Rs 54 crore, and Nykaa Rs 7.4 crore.

New-age companies like Paytm, Zomato, Delhivery and others have faced a lot of criticism in the past few years for making large ESOP grants to their top brass just before IPOs, which have since weighed on the profitability horizons of the firms. As ESOPs are typically structured to vest over a period of 4-5 years, these grants could continue to have a bearing on the financials over the next couple of years.

Paytm’s filings reveal that its large ESOP expenses have been one of the culprits of the company’s loss-making streak.

In Q3 FY24, its net loss was Rs 222 crore on ESOP spends of Rs 378 crore; in Q2 FY24, net loss was Rs 292 crore on ESOP spends of Rs 385 crore; in Q1 FY24, net loss of Rs 359 crore on ESOP spends of Rs 377 crore; in Q4 FY23, net loss of Rs 168 crore on ESOP spends of Rs 363 crore.

Select few beneficiaries

To be sure, it is not as if the average Paytm employee is reaping the bulk of the benefits of these large ESOP spends. The lion’s share of these spends seem to be happening on account of ESOP emoluments of the company’s top brass.

For instance, in the second half of FY23, Paytm reported that it spent Rs 560 crore for the ESOPs of its key managerial personnel and directors even as the company’s total ESOP spend for the period was Rs 725 crore. In effect, the top brass accounted for 77 percent of these payouts.

Venture capital backers of such new-age companies say that such large ESOP grants to founders and top executives are required to keep them interested in running the ship, given that their shareholdings are diluted to a large extent due to successive rounds of fundraise.

“If the dilution was a result of competitive raising, there could be a more sympathetic view… Maybe some amount (of ESOPs to founders) is justified, such as 1-3 percent of the company,” Info Edge founder Sanjeev Bikhchandani had said in 2022. Info Edge was one of the first backers of Zomato and Policybazaar, and still retains significant holdings in the two companies.

However, industry experts have questioned whether public market investors should bear the brunt of these companies’ top brass being rewarded by their pre-IPO backers. They feel that once a company is in the public market, any incremental rewards to the top deck in the form of ESOPs should happen when public market investors benefit from the stock’s performance.

As Paytm shares plunged by 70 percent in value within a few months of its public issue that happened at a price of Rs 2,150 per share (around $19 billion of valuation), founder and chief executive officer Vijay Shekhar Sharma declared that his ESOP grants would not vest until Paytm's share price does not cross the IPO price.

He was granted 2.1 crore stock options in FY22 as approved by the members of the company at their extraordinary general meeting on October 4, 2021, a month before the fintech major went public.

In 2023, a note by proxy advisory firm Institutional Investor Advisory Services suggested that Paytm may be circumventing regulation to grant employee stock options to Sharma. The note claimed that although the founder was not classified as a promoter, he had similar rights in the company.

Since then, Sharma’s shareholding in the company has increased to 19.42 percent as he bought Antfin’s 10.3 percent stake in Paytm.

Meanwhile, the fintech has become embroiled in a regulatory crisis as the Reserve Bank of India has placed restrictions on Paytm Payments Bank, an associate company of Paytm parent company One97 Communications, saying the actions were warranted by "persistent non-compliances and continued material supervisory concerns" in the bank.

The regulator found major irregularities in KYC, which exposed the customers, depositors, and wallet holders to serious risks.

In its probe, the regulator found that in thousands of cases, the same PAN was linked to more than 100 customers and, in some cases, the number went above 1,000. The total value of transactions, running into crores of rupees, is much beyond the regulatory limits in minimum KYC pre-paid instruments, raising money-laundering concerns.

Paytm shares are currently trading at Rs 329 apiece on BSE, down 85 percent from its IPO price.