Private equity (PE) firm General Atlantic’s $600 million investment in PhonePe was a secondary transaction to cover employees’ tax bills when they exercised stock options, according to two people familiar with the matter.
No new money came into the company, and neither the founders nor employees took cash off the table, they added.
This isn’t a routine move, especially for a company gearing up for an ₹11,000-12,000 crore initial public offering (IPO), said experts.
Mint explains:
How was the deal structured?
General Atlantic’s stake rose from about 4.4% to 9% after it bought shares from PhonePe’s Esop (employee stock option plan) pool in a secondary transaction. The two people cited above said the funds were channelled to help the fintech deduct and deposit tax (TDS) arising from employees exercising options, not to finance operations.
When an employee exercises Esops, the difference between the fair market value on that day and the exercise price is treated as a taxable perquisite—essentially, part of their salary. Employers are required to deduct tax at source (TDS) on this amount under Section 192 of the Income Tax Act.
Since TDS must be paid immediately and employees often lack sufficient funds, companies sometimes arrange financing so that the tax can be deposited while employees receive only shares, not cash. In this case, investor money was used solely to meet the TDS obligation. There was no primary raise, no operating cash inflow, and no cash to employees or founders, the two people said, on the condition of anonymity.
Why is this a unique deal?
The idea, according to the two people, was to “clean up” the Esop overhang before the IPO by helping employees convert options into shares and ensuring the company could promptly pay the TDS on those exercises.
This avoids issuing new shares, which would dilute the existing owners, and it doesn’t draw down the company’s own cash, which is beneficial when firms want their balance sheet to appear strong ahead of the listing.
It’s also quicker. A primary fundraise takes time and increases the share count; a structured secondary can be executed faster and preserves operating cash. Globally, investors have long used such secondaries to help employees exercise options; however, in India, experts said, the approach is still new but is gaining traction among late-stage, IPO-bound companies.
From a governance standpoint, such a transaction reflects a maturing Indian market where late-stage companies, particularly those preparing for an IPO, are keen to de-risk their equity pool and ensure employees can participate without prohibitive cash outflows, said Ashima Obhan, senior partner, corporate and IP law firm Obhan & Associates.
“While global markets have long used structured secondaries to facilitate ESOP exercises, in India, this remains relatively novel. Properly structured, it avoids dilution, preserves balance sheet strength, and aligns investor appetite with employee retention,” added Obhan.
Although such arrangements are still relatively nascent in the country, they aim to address a structural weakness in the ESOP regime that has long discouraged employees from exercising early, said Hardeep Sachdeva, senior partner at corporate law firm AZB & Partners.
“If executed with clear disclosures and fair valuations, they can strengthen governance by demonstrating that the company is proactively solving for employee inclusion rather than leaving it to chance,” he added.
How can investors increase their stake in such a deal?
The key question, however, remains as to how an existing investor can increase their ownership if the round is intended to fund Esop exercises and TDS rather than issue new shares.
Experts said, in practice, the investor’s stake can go up if it acquires equity tied to the Esop pool—either by purchasing options that convert into new shares or by subscribing to new shares with an understanding that the proceeds will be used to settle outstanding options.
“There are a couple of ways to do this,” said Sachdeva. “The investor can buy the options directly from employees (which will be prepared and staged by the company), in which case employees will get cash or funds, the investor will convert options into shares from the company and increase its shareholding."
Alternatively, the investor can infuse funds into the company, take shares of the company, and have a clear understanding with the issuer company that such funds will be utilized to buy back all outstanding employee options.
“Now, in this case as well, money will eventually reach employees, and the investor will have a resultant increase in shareholding because an investor will receive additional shares,” he added.
How are PhonePe’s listing preparations progressing?
PhonePe filed confidentially for an IPO with the Securities and Exchange Board of India (Sebi) in September, part of a months-long listing preparation that included appointing JPMorgan, Citi India, Morgan Stanley, and Kotak Mahindra Capital as bookrunners in February and converting into a public limited company in April this year.
The company also completed a multi-year restructuring: In 2022, it moved its domicile from Singapore to India, paying roughly ₹8,000 crore in taxes.
Founded in 2015 by Sameer Nigam, Rahul Chari, and Burzin Engineer, and majority-owned by Walmart, PhonePe has raised close to $1 billion from investors, including General Atlantic and Tiger Global, with a 2023 round valuing it around $12 billion.
General Atlantic first invested in the company in January 2023, leading a $350 million tranche and following up with additional $100 million checks in April and May 2023 as part of the company’s $850 million round.
For 2024-25, on a consolidated basis, it reported revenues of ₹7,148.6 crore, up 41% from ₹5,064.1 crore in 2023-24. Expenses increased 21% year-on-year to ₹9,394.1 crore. Consolidated loss after tax narrowed to ₹1,727.4 crore from ₹1,996.2 crore a year ago.