Vijay Shekhar Sharma, founder and CEO of Paytm’s parent company One97 Communications, has reached a settlement with the Securities and Exchange Board of India (SEBI) over a high-profile case involving the grant of Employee Stock Options (ESOPs). The case revolved around the eligibility of Sharma and his brother, Ajay Shekhar Sharma, to receive ESOPs from the company, and whether the grants complied with SEBI’s regulations governing share-based employee benefits.
The dispute started when SEBI noticed that One97 Communications had given Vijay Shekhar Sharma 21 million ESOPs and Ajay Shekhar Sharma 226,000 ESOPs in October 2021. Promoters and people who have a big say in business choices are not allowed to get ESOPs, per Indian legislation. Vijay Shekhar Sharma, who owned 14.7% of Paytm a year before to its IPO, transferred shares to a family trust shortly before the firm went public, lowering his ownership to 9.1%, according to SEBI’s probe. According to SEBI, this action gave Sharma the opportunity to appear as a non-promoter public shareholder while still holding an important amount of control over the business.
SEBI further alleged that the arrangement was structured to circumvent its regulations, as Sharma continued to exercise direct and indirect control over more than 10% of the company’s equity. The regulator also noted that Sharma was in a position to influence the Nomination and Remuneration Committee’s decisions regarding the grant of ESOPs to himself and his brother. Additionally, SEBI pointed out that disclosures in Paytm’s IPO documents did not accurately reflect Sharma’s status and influence, raising concerns about transparency and compliance.
Settlement Terms: Financial Penalties, ESOP Cancellations, and a Three-Year Ban
To resolve the matter, Vijay Shekhar Sharma, Ajay Shekhar Sharma, and One97 Communications agreed to a settlement with SEBI, paying a total amount of Rs 2.8 crore. Both Vijay and the company paid Rs 1.11 crore each, while Ajay paid Rs 57.11 lakh. As part of the settlement, the ESOPs granted to both brothers were cancelled: 21 million ESOPs for Vijay and 226,000 for Ajay. Furthermore, SEBI ordered Ajay to disgorge Rs 35.86 lakh, which he gained from the sale of shares obtained through the exercised ESOPs.
Vijay Shekhar Sharma is now prohibited from accepting any new ESOPs from any listed business for the next three years, which is a major component of the settlement. The purpose of this prohibition is to maintain SEBI’s position that promoters and people with significant influence are not eligible to receive such stock options. As is typical in regulatory settlements of this kind, the agreement was struck “without admitting or denying the findings of fact and conclusions of law.”
Vijay willingly gave up the disputed ESOPs last month, therefore the company had already suffered a significant financial loss before the settlement. Paytm’s quarterly financials showed a one-time non-cash charge of Rs 492.4 crore as a result, which had a big effect on the company’s bottom line.
Regulatory Implications and Industry Impact:
The settlement of the ESOP dispute coincides with SEBI’s assessment and revision of its share-based employee benefits guidelines. The regulator’s actions in this case highlight how crucial it is to follow the law and be transparent, particularly for listed company founders and senior management. Complex ownership arrangements and last-minute modifications to promoter status or shareholding can raise red flags and draw regulatory attention, as shown by SEBI’s probe.
The settlement serves as a reminder to the larger corporate sector of the importance of transparent disclosures and adherence to governance standards. Additionally, the case highlights how India’s ESOP requirements are changing. As long as the options were issued at least a year prior to the company’s initial public offering (IPO), SEBI has lately suggested permitting founders to use stock appreciation rights or ESOPs even after they have been designated as promoters. But as the Paytm case shows, any attempt to get around the letter of the legislation is likely to result in regulatory action.
The outcome also signals SEBI’s willingness to impose not just financial penalties but also operational restrictions, such as the three-year ESOP ban on Sharma, to ensure accountability and deter future violations.
Paytm’s Next Steps and Future Outlook:
Now that the settlement has been reached, Paytm is returning its attention to its main operations and potential expansion. The unusual penalty from the ESOP cancellation caused a large loss in the company’s most recent financial results, but management is optimistic that profitability will soon return. In his post-earnings remarks, Vijay Shekhar Sharma detailed plans to fortify Paytm’s digital payments-first strategy, contemplate the revival of its wallet business, and concentrate on merchant lending and international expansion.
Both Sharma and Paytm have clearly faced difficulties as a result of the ESOP case, but the firm may now proceed without the burden of regulatory uncertainty following its conclusion. While the company sees the three-year ESOP prohibition as a chance to strengthen governance standards and win back investor trust, Sharma sees it as a time for introspection and adjustment. As the regulatory environment for employee stock options continues to evolve, the Paytm case will likely serve as a reference point for founders, boards, and compliance officers across India’s rapidly growing startup and fintech ecosystem.
