SEBI plans to close loopholes allowing founders to own stock options

Mumbai:

The financial markets regulator plans to change its rules to address concerns about founders and family members of tech or app-based startups holding shares under the employee stock ownership plan (ESOP), two said. sources at Reuters.

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

A decision on that could come later this year, the sources added.

Under Indian laws, promoters hold direct and indirect control over the company, advise, direct and instruct the board, and have the right to appoint directors to the board, but are not allowed to own ESOPs.

“In new era tech companies, founders have reduced their stake to less than 10% and stayed away from the sponsor label,” the first source said.

The regulator is looking into the law’s loopholes and whether it is being misused, the source added.

A key example was One97 Communications Ltd, popularly known as Paytm, whose founder, Vijay Shekhar Sharma, held 14.7% stake a year before filing for an IPO in 2021.

According to the regulations in force, “a director who, either himself, through his relatives or any legal person, directly or indirectly, holds more than 10% of the outstanding shares of the company” is not eligible to receive stock options.

Vijay Shekhar Sharma reduced his stake to 9.1% by transferring 30.97 million shares to Axis Trustee Services Limited, acting on behalf of the Sharma Family Trust in 2021, which made him eligible to receive shares as part of the ESOP.

This appears to be a case unique to Paytm, where the trust route was used to reduce direct participation to less than 10%, the second source said.

“The intent of the regulations is to include all equity holding structures. This is a gap that needs to be filled, this will be done via an amendment to SEBI’s stock option rules” , added the source.

Email queries to Paytm and SEBI did not receive an immediate response. The sources declined to be named because the discussions are confidential.

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

Equity held in trust structures is not directly addressed and the designation of a founder is not defined, COO Hetal Dalal said, pointing to the two main shortcomings of the current regulations.

“As a result, founders of new-era technology companies enjoy all the benefits of being promoters and become eligible to receive ESOPs, but have none of the legal limitations and responsibilities of promoters.”

The broader issue of defining founders is being handled by a 20-member special committee headed by former Chief Justice of Punjab and Haryana High Court Shiavax Jal Vazifdar, the first source said.

“The panel has held two meetings so far and is writing a report on streamlining and strengthening current standards for mergers, acquisitions and fundraising,” the source added.

In 2021, to align with global practices, SEBI released a consultation paper suggesting moving from the promoter label to the majority shareholder label, but it has yet to formalize the standards.

(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)