Quoting two anonymous sources, wire service provider Reuters reported that the Securities and Exchange Board of India (SEBI) is considering amending its regulations to address issues regarding founders and family members of tech or app-based start-ups holding shares under the employee stock ownership plan (ESOP).
The report claimed that the individuals—apparently with first-hand knowledge of the situation—claimed that the SEBI doesn’t want the founders of tech or app-based start-ups to hold stock options while they enjoy privileges similar to those enjoyed by a company’s promoters.
Reuters claimed that its sources also indicated that a judgement regarding this matter might be made in 2023. The veracity of this claim couldn’t be independently verified.
Presently, entrepreneurs are prohibited from holding ESOPs but have direct and indirect control over the company, have the authority to counsel, direct, and teach the board of directors, as well as retain direct and indirect control over the company.
The first source was quoted by Reuters saying, “In new-age tech firms, creators have decreased their shareholding to below 10% and have avoided the promoter moniker.”
The authority is investigating whether the legal loophole is being abused, the person quoted by Reuters stated.
One97 Communications, also known as Paytm, is a prime example. Vijay Shekhar Sharma, the company’s founder, held 14.7% of the company’s stock a year before applying to go public in 2021.
According to regulations, any director with 10% or higher outstanding equity shares—directly or indirectly—can’t qualify to earn stock options.
To bypass this rule, the Paytm founder moved 30.97m shares from his family trust to Axis Trustee Services Limited in 2021. Sharma reduced his stock ownership to 9.1% and managed to qualify to receive shares under the ESOP.
The Reuters report said that as Paytm managed to exploit the loophole to move shares from the family to receive shares under the ESOP, the SEBI has decided to amend the rules and ensure that it closes the gaps that exist in the present system.
