Vijay Shekhar Sharma and Paytm Directors Under SEBI Scrutiny for IPO Compliance Issues

Vijay Shekhar Sharma, the founder of Paytm, and the company's board members from its November 2021 IPO are facing serious scrutiny from the Securities and Exchange Board of India (SEBI). According to sources familiar with the matter, SEBI has issued show-cause notices due to alleged non-compliance with promoter classification norms, following a probe initiated by inputs from the Reserve Bank of India (RBI), which had reviewed Paytm Payments Bank earlier this year.

The central issue revolves around whether Sharma should have been classified as a "promoter" during the IPO process. SEBI's investigation questions whether Sharma, who maintained management control, should have been categorized as an employee, which would have made him eligible for employee stock options (ESOPs). SEBI's regulations strictly prohibit promoters from receiving ESOPs post-IPO, raising concerns about the accuracy of the claims made during the IPO process.

Moreover, SEBI's actions are not limited to Sharma alone. The agency has also targeted the company’s directors at the time, challenging them on their endorsement of Sharma's stance. This move by SEBI marks a significant shift, as it seeks to hold board members accountable for potential compliance lapses—an area traditionally reserved for cases of financial fraud.

Before filing the IPO, Sharma had transferred 5% of his shares to a family trust, VSS Holdings Trust, which brought his stake down to 9.6%, just below the 10% threshold that defines a professionally managed company. This reclassification has raised eyebrows, particularly as Sharma retained substantial control over Paytm as a board member and operator.

The controversy deepens as SEBI's action comes three years after the IPO, despite the fact that the agency was aware of the shareholding arrangement when the offer document was filed in 2021. This delay has sparked questions, especially since the issue had been flagged by proxy advisory firms in the past. The situation further escalated in August 2023, when Sharma purchased a 10.3% stake in Paytm from Antfin Holdings, raising additional concerns about the classification of shares under 'Foreign Direct Investment.'

In contrast to companies like HDFC Bank and Larsen & Toubro, which are professionally managed with no promoters, Paytm's handling of its shareholding and promoter classification has raised significant questions, leading to SEBI's unprecedented action.