One97 Communications, the parent company of Paytm, and its founder Vijay Shekhar Sharma, have resolved a long-standing issue with the Securities and Exchange Board of India (SEBI) concerning alleged violations of employee stock option (ESOP) guidelines. The settlement concludes a year-long investigation into governance practices surrounding the company's initial public offering (IPO) in 2021.
The core of the investigation revolved around the classification of Vijay Shekhar Sharma as a "non-promoter" shareholder just before the IPO filing in July 2021. SEBI alleged that this reclassification allowed Sharma and his brother, Ajay Shekhar Sharma, to receive ESOPs that would have otherwise been restricted under SEBI rules applicable to promoters. Specifically, 21 million ESOPs were granted to Vijay Sharma and 222,862 to Ajay Sharma.
Under Indian regulations, substantial shareholders who can influence company decisions are generally not eligible to hold ESOPs. To become eligible for the ESOP grants, Vijay Shekhar Sharma reduced his stake in Paytm from 14.7% to 9.1% by transferring 30.97 million shares to Axis Trustee Services, acting on behalf of the Sharma family trust. SEBI scrutinized this maneuver, suggesting it was a scheme to circumvent regulations and maintain control over the company.
To settle the matter, One97 Communications, Vijay Shekhar Sharma, and Ajay Shekhar Sharma, reached a settlement with SEBI without admitting or denying any findings of fact or conclusions of law. As part of the settlement terms, Vijay Shekhar Sharma faces a three-year ban from receiving new ESOPs from any listed company. Furthermore, all unexercised ESOPs granted to Vijay and Ajay will be cancelled. Vijay Shekhar Sharma had already voluntarily surrendered 2.1 crore shares last month.
In addition to these measures, OCL and Vijay Shekhar Sharma will each pay a settlement fee of ₹1.11 crore. Ajay Shekhar Sharma will pay ₹57 lakh. SEBI also ordered the disgorgement of ₹35.86 lakh from Ajay Shekhar Sharma, representing gains from the sale of 3,720 OCL shares acquired through exercised ESOPs. In total, the settlement amount is approximately ₹2.8 crore.
SEBI's 12-page settlement order stated that Vijay Shekhar Sharma created a scheme through the transfer of equity to a family trust to circumvent regulations, potentially disadvantaging public shareholders. The regulator also pointed out incorrect disclosures in the IPO documents and alleged that Sharma influenced the company's remuneration committee to approve the grants.
Despite the settlement, SEBI retains the right to take further action if the involved parties breach the settlement terms or if any representations made during the process prove to be untrue. The order clarifies that the resolution does not preclude enforcement actions for other potential violations.
One97 Communications has affirmed its compliance with all terms imposed by SEBI. Prior to this settlement, the company had maintained, based on independent legal advice, that it was in compliance with all relevant regulations. The company took a one-time charge of ₹4.92 billion in the previous quarter as a result of Sharma foregoing the ESOPs.
The resolution of this ESOP issue marks the end of a significant regulatory hurdle for One97 Communications and its founder, Vijay Shekhar Sharma. While the long-term implications of the settlement, including the ban on future ESOP grants for Sharma, remain to be seen, this development provides some clarity for investors and stakeholders.
