By Jayshree P Upadhyay
MUMBAI, March 17 (Reuters) - 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 owning ESOPs.
"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 added.
Emailed queries sent to Paytm and SEBI were not answered
immediately. The sources declined to be named as the discussions
are confidential.
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 source said.
"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.
(Reporting by Jayshree P Upadhyay; Editing by Swati Bhat and
Varun H K)
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