Paytm seeks Sebi settlement over potential ESOP issuance norms violation

Regulator had slapped show-cause notice for potential violation of allotment norms

Digital payments major One97 Communications (Paytm) has filed a settlement application with the Securities and Exchange Board of India (Sebi) for potential violation of norms around issuance of employee stock option (ESOP), said people in the know.

The move follows a show cause notice (SCN) issued by the market watchdog earlier this year.

“The company has received a SCN from Sebi related to the 21 million ESOP granted to the Managing Director and CEO of the Company (which is subject to achievement of specified milestones) regarding compliance with SEBI SBEB (Share Based Employee Benefits and Sweat Equity) Regulations. The company has submitted its preliminary response and is in the process of seeking further information from Sebi in this regard,” PayTM had disclosed in its annual report for FY24.

Under the consent settlement route, an alleged wrongdoer can settle a pending violation with Sebi without denying or admitting guilt. Depending on the seriousness of the issue Sebi makes the show cause noticee to pay a fine or undergo a market ban or both.

“The SCNs were served about six months ago. Paytm has filed for consent application. The plea is under process at present,” said source.

An email sent to PayTM and Sebi remained unanswered at the time of going to press. Shares of Paytm fell almost 9 per cent in intra-day trade to a low of Rs 505.25 on the BSE before closing with a loss of 4.4 per cent on Monday to settle at Rs 530.

Paytm had granted ESOPs to VSS during the financial year 2021-22 (FY22).

Sebi rules don’t allow ESOP issuance to those holding more than 10 per cent stake. Legal experts said it is likely that Sebi could have taken an objection to ESOP grant to VSS as while on paper he holds just 9.1 per cent but has far higher voting rights.

A year ago, VSS entered into a deal with China’s Ant group to acquire its 10.3 per cent shareholding via a 100 per cent owned overseas entity Resilient Asset Management. The deal was structured in such a way that the economic value of the 10.3 per cent stake stayed with Antfin but voting rights were acquired by Resilient. In addition, VSS indirectly holds another 4.87 per cent via a family trust structure.

After VSS entered into the deal with Antfin in August last year, governance firm Institutional Investors Advisory Services (IiAS) had raised questions on whether he should be classified as a ‘promoter’.

Sharma is currently classified as an ordinary shareholder.

Of late, the market regulator has taken a stricter stance in instances where larger shareholders were not classified as promoters but had controlling stake or role. Several firms had to amend their draft documents after guidance from Sebi on reclassifying shareholders as ‘promoters’. 

The 'promoter' tag assumes significance as it comes with more onus and responsibilities.

Sources said that no fresh show-cause had been issued in the matter. However, the firm is under settlement proceedings, they added.

“The firm had received a show-cause notice nearly six months back and is trying to work out a settlement. The matter is under settlement proceedings. It will be difficult to manage so many regulatory actions from various regulators, thus the company is trying the settlement route,” said a source with direct knowledge of the matter.

Whether to allow a consent settlement is decided by an internal committee of Sebi. Later the matter is taken up by a high-powered advisory committee (HPAC) and is finally approved by a panel of whole-time members. The amount for settlement is based on several factors including the quantum of alleged illegal gains, type of violation and previous record.

“The company is in regular communication with the Securities Exchange Board of India (SEBI) and making necessary representations regarding this matter,” said Paytm in an exchange filing post market hours on Monday responding to certain media reports about fresh show-cause. 

The company clarified that the show-cause was not a new development and had disclosed it to investors in its annual report.

This is not the first time Paytm has come under the regulatory scanner. In July, the market regulator had sent an administrative warning to Paytm regarding related-party transactions with Paytm Payments Bank during FY22. Paytm Payments Bank is now defunct after the action by Reserve Bank of India (RBI).