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 company), and the board members who served during its initial public offering (IPO) in November 2021. The notices were issued for the alleged misrepresentation of facts, according to two individuals with direct knowledge of the matter.
The notices relate to Sharma’s alleged failure to comply with promoter classification norms. The probe was initiated following inputs from the Reserve Bank of India (RBI), which had earlier examined Paytm Payments Bank, the sources said.
At the heart of the issue is whether Sharma should have been classified as a promoter, given that he had management control rather than being merely an employee when the IPO documents were filed. As a result, SEBI has also issued show-cause notices to the company’s directors at that time, questioning their endorsement of Sharma’s classification, according to the sources.
SEBI regulations prohibit promoters from receiving employee stock options (ESOPs) post-IPO. Consequently, Sharma would have been ineligible for ESOPs after the listing, the sources added.
In a stock exchange filing made on Monday evening, Paytm stated, “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 and Exchange Board of India (SEBI) and making necessary representations regarding this matter. Accordingly, there is no impact on the financial results for the 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 the company’s board members to verify the accuracy of the claims made by the founder and attest to the same,” said one of the individuals cited above.
“Although SEBI has gone after directors of a company in the past, those cases were mostly related to financial fraud. This is one of the rare instances where SEBI is trying to hold the directors accountable for a potential compliance lapse, which was also not flagged by bankers or statutory auditors.”
Unless a company classifies itself as ‘professionally managed,’ all listed companies are typically assumed to be promoter-driven. For a company to be categorized as professionally managed, none of its shareholders should hold more than a 10 percent stake, and no single shareholder should have 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. Before this transfer, Sharma held 14.6 percent of One 97 Communications. After the transfer, his shareholding dropped to 9.6 percent, just below the 10 percent threshold specified in the rules.
However, Sharma was still exerting 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 since the offer document was filed in 2021. In fact, proxy advisory firms subsequently red-flagged the issue. However, SEBI initiated action only after the Paytm Payments Bank saga,” another source stated.
In August 2023, Sharma agreed to purchase a 10.3 percent stake in the company from Antfin Holdings (Netherlands). Sharma bought 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 combined to determine if the person is a promoter.
However, in this case, the stake owned through Resilient Asset Management has been classified under ‘Foreign Direct Investment,’ as shown in the company’s June 2024 shareholding pattern.
Paytm’s practice differs from other professionally run companies like HDFC Bank and Larsen & Toubro, which are managed without promoters and are overseen by a shareholder-appointed board.
