SEBI plans to remove loopholes that allow founders to own stock options

SEBI will investigate the loophole in the law and its misuse. (File)


The capital markets regulator plans to change its rules to address concerns about founders and family members of tech or app startups who own shares in employee stock ownership plans (ESOPs), two sources told Reuters.

The Securities and Exchange Board of India (SEBI) does not want founders to hold stock options similar to those enjoyed by promoters, sources with direct knowledge of the matter said.

A decision in this regard is likely to be taken this year, sources added.

Under Indian laws, promoters directly and indirectly control the company, advise, direct and instruct the board of directors and have the right to nominate directors to the board of directors, but are prohibited from holding ESOPs.

“In new-age tech companies, founders have reduced their stake below 10% and avoided the promoter tag,” the first source said.

The regulator is investigating the loophole in the law and its misuse, the source added.

One prime example is One97 Communications Ltd, better known as Paytm, whose founder Vijay Shekhar Sharma gained 14.7% equity in the year before it filed for an IPO in 2021.

According to the current rules, “a director who directly or indirectly owns more than 10% of the outstanding shares of the company through a relative or any corporate body” is not entitled to receive stock options.

Vijay Shekhar Sharma reduced his stake to 9.1% in 2021 by transferring 30.97 million shares to Axis Trustee Services Limited, which acts on behalf of the Sharma family trust, entitling him to receive shares under the ESOP.

This appears to be an instance unique to Paytm, where the trust route was used to reduce the direct equity stake to below 10%, a second source said.

“The purpose of the guidelines is to cover all structures for holding shares. This is a gap that needs to be filled, which will be done by amending SEBI’s stock options rules,” the source added.

Email queries sent to Paytm and SEBI were not immediately responded to. The sources declined to be named because the talks are confidential.

Institutional Investor Advisory Services (IIAS) first raised concerns about Vijay Shekhar Sharma’s ESOP purchases in January.

Equity in trust structures is not directly addressed and the appointment of a founder is not defined, said COO Hetal Dalal, who highlighted two key gaps in the current rules.

“As a result, founders of new-age technology companies will enjoy all the benefits of being a promoter and be eligible for an ESOP, but none of the restrictions and legal obligations of promoters.”

The big question of how to identify the founders will be decided by a 20-member special purpose committee headed by former Punjab and Haryana High Court Chief Justice Shiawax Jal Wazifdar, the first source said.

“The board has held two meetings so far and is drafting a report on easing and strengthening existing norms around mergers, acquisitions and fundraising,” the source added.

In 2021, SEBI has issued a consultation paper proposing to move from promoter to controlling shareholder status to follow the global practice, but it is yet to formalize the norms.

(Except for the headline, this story was not edited by NDTV staff and was published on a syndicated channel.)

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