Sebi looking for ways to plug gaps
allowing founders to own stock options
India's capital markets regulator is planning to
change its rules to address concerns around founders and family members of tech
or app-based startups owning shares under the employee stock ownership plan
(ESOP), two sources told Reuters.
The Securities and Exchange Board of India (SEBI) does
not want founders to own stock options if they have rights akin to those
enjoyed by promoters, the sources with direct knowledge of the matter said.
A decision in this regard could come sometime this
year, the sources added.
Under Indian laws, promoters hold direct and indirect
control over the company, advise, direct and instruct the board of directors,
and have the right to nominate directors to the board, but are barred from
"In new-age tech companies, founders have reduced
their shareholding to below 10% and have stayed away from the promoter
tag," the first source said.
The regulator is examining the gap in the law and
whether it is being misused, the source added.
One key example has been One97 Communications Ltd,
popularly known as Paytm, whose founder, Vijay Shekhar Sharma, owned 14.7%
equity a year before filing to go public in 2021.
As per current regulations, "a director who
either himself, through his relative or any corporate body, directly or
indirectly, holds more than 10% of the outstanding equity shares of the
company" is not eligible to receive stock options.
Sharma reduced his shareholding 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 under the ESOP.
This seems like an instance unique to Paytm, where the
trust route has been used to reduce direct equity holding to below 10%, the
second source said.
"The intention of the regulations is to include
all structures for equity holding. This is a gap which needs to be plugged, it
will be done via an amendment to SEBI's stock options rules," the source
Emailed queries sent to Paytm and SEBI were not
answered immediately. The sources declined to be named as the discussions are
Institutional Investor Advisory Services (IIAS) first
flagged concerns around Sharma's ESOP purchases in January.
Equity held in trust structures is not addressed
directly and the designation of a founder is not defined, COO Hetal Dalal said,
highlighting the two key gaps in the current regulations.
"As a result, founders in new-age tech companies
enjoy all the benefits of being promoters and become eligible to receive ESOPs,
but have none of the limitations and legal responsibilities of promoters".
The larger issue of how founders should be defined is
being addressed by a special purpose, 20-member panel headed by former Chief
Justice of Punjab and Haryana High Court, Shiavax Jal Vazifdar, the first
"The panel has held two meetings so far, and is
drafting a report on simplifying and strengthening the current norms around
mergers, acquisitions and fundraising," the source added.
In 2021, to keep with global practices, SEBI issued a
consultation paper that suggested moving away from the promoter tag to the
controlling shareholder tag, but it hasn't yet formalised the norms.