Paytm cue: Adhere to stock option rules in both letter and spirit

Although One97 has denied having received a new show-cause notice from the Securities and Exchange Board of India (Sebi), its 2021 issuance of employee stock options to founder-CEO Vijay Shekhar Sharma continues to haunt it, evidently. 

The business, which went public almost three years ago, is trying to settle the case through a mechanism that lets a listed firm pay a penalty or face a market ban, depending on the gravity of the alleged violation, in lieu of the matter being closed without it having to accept or deny the charges. Even if this effort fructifies, the cloud this episode has cast on its image is unlikely to lift.

Also read: Promoters’ salaries are only part of what they take home

One97 is accused of having violated a Sebi rule for Employee Stock Ownership Plans (ESOPs) that bars promoters from being awarded stock options. Under this norm, a shareholder with over a tenth of a listed company’s equity pie cannot claim non-promoter status and is not entitled to an ESOP award. 

As reported, Sharma had owned around 9% of the firm’s equity, a figure on which the award’s defence appears to rest, primarily. But then, that was just his directly owned stake. Notably, levels of ownership and control are not always the same. 

Sharma has additional shares owned indirectly via a family trust that would take his interest above the Sebi cutoff. Plus, Sharma last year struck a complex offshore deal with Antfin Holding BV that reportedly gave him an added 10.3% of One97’s voting rights and effectively made him its single largest owner. 

All counted, he has a significantly large interest in the firm he founded, and by all accounts, his authority over the business as its prime mover has been high all along. That One97 has been under Sebi’s scanner for possibly having misled public investors over Sharma’s role should not surprise anyone. 

Also read: Paytm issues clarification on SEBI notice, says ‘not a new development’

Even if we split hair over when exactly he held what stake and delve into the minutiae of rule compliance, it is amply clear that Sharma’s tag as a ‘promoter’ cannot be shaken off in investor perception.

As far as investors are concerned, both the letter and spirit of the rules matter. The purpose of an ESOP is well known. The idea is to grant salaried professionals the option of claiming a slice of equity at a preset price so that they strive to deliver a performance that would raise its value over time. 

It’s an incentive designed to align the interests of recruits with those of owners, as both would be enriched by growth in the company’s market valuation. It was not meant for promoters, who are invested in the business to begin with and usually retain such large stakes that they need no extra motivation to help make it perform better. 

An ESOP award to anyone with a substantial chunk of ownership is therefore likely to raise investor eyebrows for falling afoul of the idea’s spirit, regardless of the fine print. 

While the Paytm case is yet to reach a conclusion, the reputational damage incurred by its questionable ESOP allotment should serve as a warning to other startups looking to list their shares for public trading.

Also read: Paytm shares fall 9% on reports of SEBI show-cause notices to CEO Vijay Shekhar Sharma, board members

Investors at large expect listed companies to be governed well. And shareholder value is best increased by adhering to the spirit as much as the letter of business rules.