SEBI Mulls Changes To Bar Startup Founders With Promoter Rights From Owning Stock Options

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SEBI is reportedly examining gaps in the current regulations and is also looking at misuse of the norms

Founders of many new-age tech startups have reduced their shareholding to below 10% to stay away from the promoter tag and be eligible to own stock options

In January, IiAS called for SEBI intervention to examine Paytm CEO Vijay Shekhar Sharma’s move to trim his shareholding in the company by transferring some of his stake to a family trust

The Securities and Exchange Board of India (SEBI) is reportedly mulling steps to address concerns about founders of tech startups and their family members owning stock options.

Sources told Reuters that the market regulator is looking to amend its rules to bar startup founders, with rights equivalent to promoters, from owning shares under employee stock ownership plans (ESOPs).

A final call on the matter could be taken as soon as later this year. 

Under the current regulations, promoters are banned from owning ESOPs but enjoy a slew of rights including advising and directing the board of directors. They also have the right to nominate directors to the board. 

Promoters are defined as stakeholders with more than 10% shareholding in a company.

“In new-age tech companies, founders have reduced their shareholding to below 10% and have stayed away from the promoter tag,” a source was quoted as saying. 

SEBI is said to be examining the gaps in the current regulations and is also looking at misuse of the norms. 

The report, citing sources, said that SEBI plans to ‘include all structures for equity holding’ through the new norms, which would be implemented through amendments to SEBI’s stock options rules.

Besides, a person privy to the development also said that a 20-member panel is looking into the matter of how founders should be defined. The panel, which is headed by former Chief Justice of Punjab and Haryana High Court Shiavax Jal Vazifdar, has already held two meetings and is working on a report to simplify and strengthen current norms around mergers and acquisitions and fundraises. 

Trouble For Paytm?

While the matter is still under deliberation, any such move could weigh heavily on fintech major Paytm and its cofounder and CEO Vijay Shekhar Sharma. 

A year prior to Paytm’s public listing, Sharma’s stake in the fintech major stood at around 14.7%, which he reduced to 9.1% in 2021. He did this by transferring 3 Cr shares to a family trust, which eventually made him eligible to receive stock options as per the regulations.

Subsequently, Paytm reported that it spent INR 567 Cr on ESOP expenses in FY22, up 50X year-on-year (YoY), largely on account of ESOPs for key management personnels (KMPs), including Sharma and CFO Madhur Deora.

Besides, the company also incurred ESOP expenditure worth INR 564 Cr on account of directors, KMPs and relatives of the KMPs in the first half of FY23. 

The matter had already raised eyebrows. Earlier this year, proxy advisory firm Institutional Investor Advisory Services (IiAS) sought SEBI intervention to examine Sharma’s move to trim his shareholding in the fintech major by transferring his stake to a family trust. The advisory firm also said that the fintech major could be circumventing laws to grant stock options to its CEO. 

The latest report comes at a time when the fintech major has been swinging between both positive developments and market pressures. On one hand, Paytm saw its disbursals grow to a record 40 Lakh loans worth INR 4,158 Cr in February. On the other hand, its shares have been under pressure on the bourses.

While Paytm’s company secretary and compliance officer Amit Khera resigned earlier this month, reports have also emerged that investors SoftBank and Ant Group are looking to offload their stakes in the company. Shares of Paytm fell about 2.5% this week to end at INR 578.5 on the BSE.

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