SEBI Issues Show-Cause Notices to Paytm Directors Over IPO Violations

India’s market regulator, the Securities and Exchange Board of India (SEBI), has issued show-cause notices to Vijay Shekhar Sharma, the founder of One 97 Communications Ltd (Paytm’s parent company), and board members who were in office during the firm’s initial public offering (IPO) in November 2021. The notices allege misrepresentation of facts, particularly concerning Sharma’s classification in the IPO filings.

Alleged Misclassification 

At the center of the issue is whether Sharma should have been classified as a “promoter” rather than an employee. SEBI’s investigation, initiated following inputs from the Reserve Bank of India (RBI), questions Sharma’s classification as a public shareholder and not a large shareholder or promoter. According to Indian regulations, promoters with major control are ineligible to receive employee stock options (ESOPs) post-IPO. Sharma, who held a 14.7% stake in Paytm a year before the IPO, reduced his shareholding to 9.1% by transferring shares to a family trust, potentially to avoid being classified as a promoter and retain eligibility for ESOPs.

SEBI’s Concerns & Market Impact

SEBI has expressed concerns about the fiduciary responsibility of Paytm’s board members, questioning their endorsement of Sharma’s classification as a public shareholder. SEBI argues that it was the directors’ duty to verify the accuracy of the claims made by Sharma. The show-cause notices have led to active market reactions, with Paytm shares dropping by as much as 8.9% before closing down 4.4% following the news. But, it opened around 2.5% up today, showing a positive trend.

In response to the notices, Paytm stated that this issue is not new and has already been disclosed in their financial results for the quarters ended March and June 2024. The company also said that it is in regular communication with SEBI and is making the necessary representations regarding this matter.

Conclusion: In conclusion, SEBI’s action brings out its stance on the importance of accurate promoter classification, especially in tech companies where founders often retain huge influence. The outcome of this case could set a precedent for how similar cases are handled in the future.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.