Introduction
As India Inc gallops toward becoming one of the largest start-up ecosystems of the world[1] and more start-ups gear up to become IPO-ready[2], there is a need to ensure that “ease of doing business” is rooted in the highest standards of corporate governance to protect the interests of minority investors.
Traditionally, the bankability of a business is intrinsically linked to the confidence placed in the promoter of the company. However, the promoter designation comes with disclosure norms, compliance burden and potential exposure to liability. In view of this, the new-age technology start-ups, which have significantly diluted founder shareholding on account of multiple fund-raising rounds until IPO, are increasingly inclined to classify themselves as professionally managed companies (“PMCs”), i.e. a company without identifiable promoters. However, SEBI rigorously scrutinises such classification to ensure compliance with corporate governance norms. SEBI’s scrutiny of classification of Mr. Vijay Shekhar Sharma, the founder of One97 Communications Limited (“Paytm”), as a public shareholder and consequent issuance of employee stock options (“ESOPs”) to him right before Paytm’s IPO makes for an interesting case study.
Tracing Paytm founder’s shareholding trajectory
Until June 2020, Mr. Sharma was classified as a promoter of Paytm.[3] However, when Paytm filed its IPO papers in 2021, it classified itself as a PMC.[4] Prior to the filing of Paytm’s offer documents, Mr. Sharma held over 10% of the company’s shares. However, after transferring 4.7% of his shares to a family trust, Mr. Sharma’s direct shareholding reduced to 9.1% of Paytm’s pre-offer equity share capital.[5] Before the IPO, Paytm had granted 21 million ESOPs to Mr. Sharma.[6] Two years later, in 2023, Paytm announced that Mr. Sharma had entered into an agreement with Antfin (Netherlands) Holding B.V. (“Antfin”), pursuant to which Antfin transferred 10.30% of Paytm’s share capital to Resilient Asset Management B.V., an entity 100% owned by Mr. Sharma.[7]
In February 2024, SEBI issued show cause notices (“SCN”) to Paytm and Mr. Sharma, inquiring about non-compliances with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”), SEBI (Listing Obligations and Disclosure Requirements), 2015 (“LODR Regulations”), and SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“SBEB Regulations”). SEBI’s probe hinged on: (i) whether Paytm’s founder should have been classified as a promoter in the offer document, considering his consolidated shareholding both directly and indirectly; and, (ii) if yes, whether Mr. Sharma was eligible to receive ESOPs in accordance with the SBEB Regulations as these regulations render a promoter ineligible to receive ESOPs[8], to prevent potential conflicts of interest. The adjudication proceedings initiated against Paytm and Mr. Sharma have now been settled, pursuant to SEBI’s settlement order, in terms of which the settlement amounts have been paid to SEBI. As part of the settlement conditions, Paytm has cancelled ESOPs granted to Mr. Sharma. Further, Mr. Sharma cannot accept fresh ESOPs from any listed company for a period of three years.[9]
In this article, we have analysed the scope of regulatory arbitrage in current promoter-classification norms, and SEBI’s attempt to eliminate this, through suggested legislative amendments across consultation papers and enforcement actions, which underscore SEBI’s focus on “substance over form”, when it comes to adjudicating compliance with corporate governance norms.
Scope for regulatory arbitrage
To be (promoter), or not to be (promoter), that is the question
The lifecycle of new age companies and tech start-ups from inception to IPO involves multiple rounds of funding, which over time, dilutes the founder shareholding to significantly low levels as compared to promoters of traditional businesses. While the terms “founder” and “promoter” may seem synonymous at an unlisted stage, the former is not a legally defined term and has no legal liability towards stakeholders. Classification as a “promoter” of a listed company, however, has legal implications. For instance, promoters of IPO-bound entities are inter alia: (i) required to contribute at least 20% of the post-issue capital; (ii) subject to lock-in restrictions, preventing transfer of securities held by the promoter for a certain time period, ranging from 18 months to three years; and (iii) exposed to both civil and criminal liability for misstatements in the IPO offer documents.[10]
Therefore, as these start-ups grow and prepare for public listing, there is an incliniation to classify themselves as PMCs and relieve the founders from the promoter-tag and its related responsibilities and liabilities in a listed company.
Under existing regulations, there is no objective criteria for determining a company as a PMC. In the erstwhile promoter re-classification regime under the LODR Regulations, if existing promoters sought re-classification as public shareholders on account of a company becoming “professionally managed”, it had to be demonstrated that inter alia no person or group, along with persons acting in concert, held more than 1% of the paid up capital[11] and that the exiting promoters seeking re-classification did not have any special rights, through formal or informal arrangements. The Kotak Committee Report on Corporate Governance had observed that this 1% threshold was too low and merits an increase to 10%, since an existing promoter seeking re-classification may want to continue as a financial investor with a shareholding of more than 1%, but such a person is unlikely to be able to exercise de facto control unless he holds more than 10%.[12] Under the current promoter re-classification regime, the term “professionally managed companies” has been dispensed with entirely replacing it with “listed companies with no promoter”, and a promoter seeking re-classification as a public shareholder is required to inter alia demonstrate that, directly or indirectly, together with persons related to him, he does not hold more than 10% of the total voting rights and has no special rights in the listed entity.
In the absence of any formal guidance available for IPO-bound companies on classification as a PMC, the principles of promoter re-classification under Regulation 31A of the LODR Regulations (which become applicable post-listing) should be the yardstick against which it is tested — to gauge whether such companies, in essence, have grown to become professionally managed, and, therefore, do not warrant founders to be classified as “promoters”.
Testing de facto control is the answer
A promoter inter alia is a person who has “control” over the affairs of the company, whether directly or indirectly, and on whose directions, the board is accustomed to act.[13] “Control” [14], as defined under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”), has been a subject of longstanding debate due to its wide connotations, and what constitutes control often requires a case-by-case determination. The key factors to be considered while determining “control” include, shareholding (direct and indirect), management rights, shareholders agreements, voting agreements, etc. Given that founders usually retain board nomination rights, board permanency, and management leadership in the company after it is listed, heightened scrutiny is key to determining whether they should be designated as “promoters”.
In the Paytm case, although right before its IPO, the founder’s stake was reduced to just below 10% through a transfer to his family trust, Mr. Sharma could potentially have had direct and indirect voting rights exceeding 10%. It also appears that he was entitled to board nomination rights and board permanency.[15]
SEBI’s scrutiny into whether Paytm’s founder should have been, in fact, listed as a promoter in its IPO documents highlights the need for a principle-based approach for IPO-bound entities in identifying founders as non-promoters. This entails assessing factors such as direct and indirect voting power, special rights, board representation, and permanency, individually and collectively, to determine if the founder’s level of influence over the affairs of the company constitutes de facto control, thereby necessitating classification of a founder as a promoter.
Evolving Landscape & Way Forward
When it comes to scrutinising compliance with corporate governance norms, SEBI’s approach of substance over form has been longstanding, while also ensuring that the compliance burden does not thwart ease of doing business. In 2021, SEBI, through its consultation paper[16], had acknowledged the need to re-imagine the concept of “promoter” and “promoter group” to “controlling shareholder”/ “persons in control”, in view of the changing nature of ownership in listed entities. This could be a step in the right direction and would suitably fit in the context of new age companies and tech startups, if implemented with the necessary safeguards and in consultation with other sectoral regulators.
Against the backdrop of SEBI’s settlement order in the case of issuance of ESOPs to Paytm’s founder, SEBI’s recently released consultation paper[17] is rather interesting. It acknowledges the merits of issuing ESOPs to founders of new age tech companies to boost their holdings and incentivise them to scale their ventures for the long term. Towards this, SEBI has proposed that ESOPs granted to founders prior to one year from the date when the company decides to undertake an IPO may continue to be held, exercised and availed by the founders, regardless of whether they are named as promoters in the IPO documents.
Although awaiting implementation, these proposals signal SEBI’s attempt to keep pace with the evolving Indian markets and investor landscape, while safeguarding the interests of minority investors.
For further information, please contact:
Akila Agrawal, Partner, Cyril Amarchand Mangaldas
akila.agrawal@cyrilshroff.com
[1] Press Information Bureau, Ministry of Commerce and Industry (January 15, 2025), “Nine Years of Startup India – With 1.59 lakh startups, India is now world’s 3rd largest startup ecosystem” < https://pib.gov.in/PressReleasePage.aspx?PRID=2093125#:~:text=With%20more%20than%201.59%20lakh,startup%20ecosystem%20in%20the%20world >.
[2] Team Inc42 (April 20, 2025), “Indian Startup IPO Tracker 2025” <https://inc42.com/features/indian-startup-ipo-tracker-2025/>.
[3] Page 327, One97 Communications Limited – Prospectus <https://www.sebi.gov.in/filings/public-issues/nov-2021/one97-communications-limited-prospectus_53936.html>
[4] Page 29, One97 Communications Limited – Prospectus.
[5] Pages 120 & 121, One97 Communications Limited – Prospectus.
[6] Mr. Sharma was granted 21 million ESOPs between April 01, 2021 and November 08, 202: Pages 123 & 125, One97 Communications Limited – Prospectus.
[7] One 97 Communications Limited (August 7, 2023), Disclosure under Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
[8] Regulation 2(1)(i)(iii), SBEB Regulations, explicitly excludes promoters, promoter group entities, and any director with over 10% shareholding from the definition of an “employee”.
[9] SEBI’s Settlement Order dated May 08, 2025 in the matter of One97 Communications Limited; In relation to Paytm cancelling ESOPs granted to Mr. Sharma, See also: One 97 Communications Limited (April 16, 2025), Disclosure under Regulation 30 of LODR Regulations.
[10] Other key post-listing compliances include: (i) compliance with minimum public shareholding norms; (ii) “related party” disclosure requirements, irrespective of shareholding; (iii) identification and updation of promoter group and quarterly disclosure of shareholding pattern of promoter group. Further, freezing of promoter group shareholding is often used as an enforcement tool in securities market.
[11] Erstwhile Regulation 31A, LODR Regulations:- …For the purposes of this sub-regulation an entity may be considered as professionally managed, if- (i) No person or group along with persons acting in concert taken together shall hold more than one per cent paid-up equity capital of the entity…This regulation was substituted by SEBI (LODR) (Sixth Amendment) Regulations, 2018 with effect from November 16, 2018.
[12] Page 54, Kotak Committee on Corporate Governance in its report to SEBI dated October 5, 2017.
[13] Section 2(1)(oo), ICDR Regulations, 2018; section 2(69), Companies Act, 2013.
[14] As per Section 2(1)(e), Takeover Code, “control” includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
[15] Article 113, Articles of Association of One97 Communications Limited; See also page 517, One97 Communications Limited – Prospectus.
[16] SEBI (May 11, 2021), Consultation Paper on “Review of the regulatory framework of promoter, promoter group and group companies as per Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018”.
[17] SEBI (March 20, 2025), Consultation Paper on amendments to SEBI (ICDR) Regulations, 2018, and SEBI (SBEB & SE) Regulations, 2021, with the objective of streamlining certain processes related to requirements of a public issue.
