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Paytm Founder and CEO Vijay Shekhar Sharma may not be eligible for employee stock options, according to a note by proxy advisory firm Institutional Investor Advisory Services.

Under Indian regulations, a director who directly or indirectly holds more than 10% of equity shares in the company is not eligible to receive stock options.

While Vijay Shekhar Sharma owns less than 10% stake, the note points out that he has rights similar to a promoter.

Vijay Shekhar Sharma is a non-retiring director on Paytm’s board and his reappointment as Managing Director will require shareholder approval after five years. According to the IiAS note, he could have board permanency if he decides to let go of his executive role and become a non-executive director

“These provisions and structures give Vijay Shekhar Sharma ‘entrenchment’ similar to that enjoyed by promoter families in more traditional companies,” IiAS said in the note.

It added that market regulator SEBI needs to consider if Vijay Shekhar Sharma’s direct equity and that held on behalf of the Sharma Family Trust ought to be aggregated to test for compliance with the 10% threshold set out in both, under Indian regulations and Paytm’s ESOP scheme.

According to the company’s red herring prospectus before the IPO in November 2021, Vijay Shekhar Sharma’s direct equity holding was reduced by 30.97 million shares, and Axis Trustee Services Ltd, acting on behalf of the Sharma Family Trust, acquired 30.97 million shares of the company’s equity.

This brought down the founder’s direct equity shareholding at the time of the IPO to 9.1%, from 14.7% a year prior.

Paytm’s buyback

Paytm’s buyback that was announced last year will keep Vijay Shekhar Sharma’s direct equity stake below 10%, even if the shares are bought at the current market price, which is considerably lower than the maximum buyback price of Rs 810 apiece.

Paytm granted Vijay Shekhar Sharma 21 million stock options in FY21, which IiAS notes was larger than the size of the buyback announced on December 13, 2022. If he exercises about 30% of his stock options, his direct equity stake will reach the 10% threshold.

These stock options can be exercised at Rs 9 per share: the fair value of stock options granted aggregates about Rs 39.6 billion or $495 million, which is higher than the compensation of all of S&P BSE SENSEX CEOs

put together, IiAS highlighted in its note.

Stock option disclosure

On the performance measures to accomplish, no disclosure was made until Vijay Shekhar Sharma in a letter to shareholders last year said his stock options would vest only once Paytm’s “market capitalisation has crossed the IPO level on a sustained basis”.

“This lack of clarity on what determines variable pay is similar to what is often seen in compensation disclosures of ‘promoter’ CEOs,” IiAS said.

On Vijay Shekhar Sharma’s disclosure, IiAS noted, “This was the first instance when the vesting conditions were disclosed – it also needs to be reviewed if a filing under Regulation 30 was warranted at the time of this disclosure.”

“Remuneration practices also seem to mirror those that are commonly seen for promoters in promoter-run companies,” it added.

Not limited to Paytm

The IiAS note stated that several founders may be playing the regulatory arbitrage between rights akin to a promoter versus the financial gains of not being classified as one. Regulations need to catch up to these structures.

“This trend is typically seen in companies that have private equity investors in their pre-IPO cap table,” it said.

These founder enjoy several perks of a promoter such as board permanency, board control, and management leadership. They also have a roundabout way to enjoy ESOPs, which normally promoters cannot receive under Indian regulations, and their equity holdings do not carry the restrictions as those classified as promoters, IiAS said in its note.