PAYTM could be in for a small trouble as SEBI has issued show-cause notice to promoters of the company for alleged violations during IPO. The news led to 9 percent decline in PAYTM shares but this could be a minor issue that PAYTM should be able to resolve with some fines on the promoters. The bigger issues PAYTM faces, will be difficult to deal with and the company will need to take strong action to once again get in the good books of regulators. The notices center on allegations of misrepresentation regarding Sharma's classification as a promoter, an issue highlighted by the Reserve Bank of India’s earlier examination of Paytm Payments Bank. The central question is whether Sharma should have been classified as a promoter rather than an employee, which has implications for his eligibility to receive employee stock options (ESOPs). The board’s role in endorsing Sharma’s classification is also under scrutiny, raising concerns about corporate governance and compliance with regulatory norms.

Sebi Issues Show-Cause Notices to Paytm Founder and Board Members

Alleged Misrepresentation During IPO
Vijay Shekhar Sharma, founder of One 97 Communications Ltd, and the board members who served during the company’s initial public offering (IPO) in November 2021, have received show-cause notices from Sebi. The allegations focus on potential misrepresentation of Sharma’s status as a promoter, which has significant implications for the company’s compliance with regulatory norms.

Promoter Classification Under Scrutiny

Management Control vs. Employee Status
At the core of the investigation is whether Sharma should have been classified as a promoter rather than an employee at the time of the IPO. Sebi's probe, initiated based on inputs from the Reserve Bank of India, questions Sharma’s management control over the company and whether this control should have precluded him from receiving employee stock options (ESOPs) post-IPO.

Board Members’ Fiduciary Duties Questioned

Responsibility for Verifying Founder’s Claims
The show-cause notices also extend to Paytm's board members, raising questions about their role in verifying and endorsing Sharma's classification as an employee. Sebi argues that it was the fiduciary duty of the board to ensure the accuracy of the claims made by Sharma, and their potential failure to do so could represent a compliance lapse.

Complexities of Promoter-Driven vs. Professionally Managed Companies

Paytm’s Shareholding Structure Under the Microscope
Typically, companies are assumed to be promoter-driven unless they qualify as professionally managed, which requires no shareholder to hold more than a 10% stake. Sharma’s transfer of 5% of his shareholding to a family trust prior to the IPO reduced his stake to 9.6%, below the 10% threshold. However, Sebi is questioning whether Sharma’s continued control over the company disqualifies it from being considered professionally managed.

Delayed Regulatory Action Raises Questions

Sebi’s Timing and the Paytm Payments Bank Connection
One of the contentious issues in this case is the timing of Sebi’s action, nearly three years after Paytm’s IPO. Despite having knowledge of the shareholding arrangement since the offer document was filed, Sebi only initiated action following the recent controversies surrounding Paytm Payments Bank, leading to speculation about the regulatory body's motives.

Vijay Shekhar Sharma’s Recent Stake Acquisition

Stake Purchase and FDI Classification
In August 2023, Sharma acquired a 10.3% stake in Paytm from Antfin Holdings through Resilient Asset Management BV, a company owned by Sharma. This stake, however, has been classified under Foreign Direct Investment (FDI) rather than being aggregated with his other holdings. This practice diverges from that of other professionally managed companies, such as HDFC Bank and Larsen & Toubro, which have no promoters and are overseen by shareholder-appointed boards.