Advisory Firm IiAS Questions ESOPs For Paytm CEO, Demands SEBI’s Intervention

Training guns at Paytm, proxy advisory firm Institutional Investor Advisory Services (IiAS) has now raised concerns that the fintech major could be bypassing laws to grant employee stock options (ESOPs) to its founder and chief executive officer (CEO) Vijay Shekhar Sharma.

In a note, the advisory firm raised two concerns – whether Sharma meets the definition of a promoter under the SEBI norms, and whether his direct or indirect cumulative shareholding in the fintech major was less than 10%.

The advisory firm called on the SEBI to examine Sharma’s move to trim his direct stake in Paytm by transferring his shares to a family trust. 

“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,” said IiAS. 

This is the advisory firm’s major contention, as the law bars issuance of ESOPs to promoters, who, directly or indirectly, hold more than 10% of the firm.

The advisory firm claimed that Sharma enjoyed the rights of a promoter, including a potential seat at the company’s board, even though he is not listed as one. Under Paytm’s articles of association, Sharma can appoint a board member if he holds more than 2.5% stake and an executive position in the fintech major. 

Lashing out at the fintech top executive, IiAS said, “These provisions and structures give Vijay Shekhar Sharma ‘entrenchment’ similar to that enjoyed by promoter families in the more traditional companies.”

Meanwhile, in a statement sent to news agency ANI, the fintech major has rubbished IiAS’ claims, saying that it followed all norms, including shareholders approval, while granting ESOPs. 

Noting that Sharma’s remuneration was fixed for the next three years without any annual increment, Paytm added that this practice was also unlike policies applicable to other company employees and in other firms. 

“Moreover, in earlier years, Sharma gave 4% of his equity to create an ESOP pool for Paytm that helped the company to attract talent. Sharma has never received any ESOP before the IPO, while there are enough examples of founders receiving 5% to 10% as ESOPs,” a company spokesperson said. 

On questions surrounding Sharma enjoying rights as a promoter, the fintech major told the news agency that there were specific provisions of the law that dictate whether a shareholder is classified as a promoter or not, adding that Sharma’s classification as a non-promoter was entirely in accordance with the applicable law.

In The Line Of Fire

At the end of financial year 2021-22 (FY22), Paytm reported that its ESOP expenses on account of key management personnel (KMPs), including CEO and managing director Vijay Shekhar Sharma and CFO Madhur Deora, grew 50X to INR 567 Cr in FY22.

According to a recent regulatory filing, the fintech major spent INR 564 Cr in lieu of ESOP expenses towards directors, KMPs and relatives of the KMPs in the first half of FY23.

The fintech major has been criticised for granting big ESOPs to top executives despite a tumultuous 2022. The company saw its losses balloon as macroeconomic pressures wreaked havoc on the fintech major. 

Shares plummeted to record lows, falling more than 57% from its 12-week high of INR 1,288.70 in January last year. The expiration of the lock-in period for pre-IPO investors also saw investors leave in droves, including tech investor SoftBank, which offloaded 4.5% stake in Paytm.

Interestingly, this is not the first time that the advisory firm has questioned the fintech major publicly. In 2022, IiAS opposed the reappointment of Vijay Shekhar Sharma as the CEO of Paytm. Recently, it raised questions on the company’s share buyback plan.

Shares of Paytm closed at INR 550.70 on the BSE on Friday.

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