Paytm shares fall 9% on reports of SEBI show-cause notices to CEO Vijay Shekhar Sharma, board members

Paytm share price fell nearly 9% on Monday after a report stated that the capital markets regulator Securities and Exchange Board of India (Sebi) has issued show-cause notices to Paytm CEO Vijay Shekhar Sharma and its board members. Paytm shares plunged as much as 8.8% to ₹505.25 apiece on the BSE.

Sebi has issued a show cause notice to Sharma and Paytm board members who served during its initial public offering (IPO) in November 2021 for alleged misrepresentation of facts , a report by Moneycontrol said.

One 97 Communications Ltd., the parent company of the Paytm brand, clarified that the reports about it receiving a show cause notice from the Securities and Exchange Board of India (SEBI) are not recent news. The company had already disclosed this issue in its financial statements for the year ending March 31, 2024, and for the quarter ending June 2024, as noted in its Bombay Stock Exchange (BSE) filing on Monday, August 26.

“With reference to recent media reports, we would like to inform you that this is not a new development, as the Company had already made relevant disclosures on this matter in its financial results for the quarter and year ended March 31, 2024, as well as the quarter ended June 30, 2024,” said the company in the exchange filing.

The show-cause notice is regarding alleged non-compliance with promoter classification norms. The inquiry was started on the basis of the inputs from the Reserve Bank of India (RBI) probe on Paytm Payments Bank earlier. The issue is whether Paytm CEO should be classified as a promoter as he had management control instead of an employee while filing IPO documents, the report said.

Sebi issued show-cause notices to the company’s board members for endorsing Paytm CEO's stand, the report stated.

Sebi norms does not allow promoters from getting employee stock options (ESOPs) after listing. Hence, Paytm CEO would have been ineligible to get ESOPs.

“Sebi is taking the view that Sharma should have been classified as a promoter, and it was also the fiduciary duty of board members of the company to verify the accuracy of the claims made by the founder and attest the same,” the report said quoting one of the person aware of the matter.

“Although Sebi has gone after directors of a company in the past, they have been mostly cases of financial fraud. This is one of the rare cases where Sebi is trying to hold the directors responsible for a potential compliance lapse, which was also not pointed out either by bankers or statutory auditors,” it added.

Companies are generally promoter driven except when they classify themselves as ‘professionally managed.' The shareholders in a professionally managed company should not have more than 10% stake.

According to the report, Paytm CEO transferred 5% of his shareholding to VSS Holdings Trust, a family trust before filing for IPO. Before this transfer, he had 14.6% stake in One 97 Communication, which came down to 9.6% after the transfer. This was below the 10% limit as per the regulations. Paytm CEO Vijay Shekhar Sharma also has a certain control as he was on the company's board and was in charge of running the company.

According to the report, VSS Holdings Trust is fully owned by Paytm CEO. Previously, the company has stated that Paytm CEO has not more than 5% stake in the trust.

“A key issue in the case is that Sebi has initiated action three years after the listing. Sebi had known about the shareholding arrangement ever since the offer document was filed in 2021. In fact, subsequently, proxy advisory firms have also red-flagged the issue. However, Sebi initiated action only after the Paytm Payments Bank saga,” the report said citing another person aware of the issue.

The report also mentions that Vijay Shekhar Sharma had bought 10.3% in the company from Antfin Holdings in August, 2023 through Resilient Asset Management BV, owned by the Paytm CEO.

Generally, if the same person has a share in a company through multiple entities, all the stakes are taken together to check if the person is a promoter, it said.

The stake purchased through Resilient Asset Management is classified as ‘Foreign Direct Investment,’ the report stated citing the company's June 2024 shareholding pattern.