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Allocation of ESOS to Promoter- A Case Study on PayTm

The recent events of Mr Vijay Shekhar Sharma, the Founder, CEO and Managing Director of One 97 Communications Limited, popularly known as Paytm, availing employee stock options issued by the company has left legal analysts and compliance professionals to brainstorm and attempt to redefine the term “promoter” and its implications on ESOS under the Companies Act and SEBI Regulations. This article is an attempt to shed some light on the classification of promoters in the legal regime of the country in light of the Paytm controversy.

The provisions of the Companies Act[1] and SEBI Employee Benefits Regulations[2] exclude promoters and members of the promoter group, and directors holding more than 10% stake in the company from the purview of the term “employee” and thereby prohibit them from participating in Employee Stock Option programmes.

Mr Vijay Shekhar Sharma, who has been a member of the Board of One 97 Communications Limited (CIN: L72200DL2000PLC108985) since the year 2000, recently shed part of his 14.7% stake in the company amounting to around 31 million shares and reduced his shareholding to 9.1%, thereby surpassing the 10% criteria[3] for Directors’ eligibility to participate in employee stock options. However, in a not-so-uncanny coincidence, Axis Trustee Services Ltd, acting on behalf of the Sharma family acquired almost the exact number of shares in the company that Mr Sharma had divested.

This scenario raises a number of questions. Should the shares held by the Sharma family trust be aggregated with Mr Sharma’s holdings which would disqualify him as a director from participating in the ESOS? And if not, should he be debarred nevertheless as he has the role of a promoter in the company?

The wordings “by himself or through relatives or body corporates” and “directly or indirectly” require very crucial examination. The definition of body corporate[4] does not cover trusts and the position is reiterated in various Supreme Court rulings[5]. It has been held that a trust per se is not a separate legal entity and therefore cannot be sued in its own name. However, that also implies that whatever is done through the trust can be said to be done through the members of the trust.

M/s Axis Trustee Services Ltd, an incorporated public limited company that is undoubtedly a body corporate, have acted through the Sharma Family Trust in acquiring the shares in the company, and by extension through the members of the trust, who are none other than the relatives and family members of Mr. Sharma. The composition of members of the trust needs to be scrutinised to determine if they are “relatives”[6] of Mr. Sharma as per the legal definition of the term. A thorough judicial investigation is necessary to determine the aggregate of “direct and indirect shareholding” of Mr. Sharma held through himself, his relatives and body corporates.

It is the author’s view that the shares owned by Axis Trustee Services Ltd. are an instance of indirect shareholding of the relatives of the company Founder held through a body corporate, and should therefore be cumulated to the total shareholding of Mr. Sharma. The letter and spirit of the law appear to be in favour of preventing persons who are active in the management of the company from availing statutory incentives designed to benefit the labour force.

The second question that requires attention is whether Mr. Sharma is a promoter of the company even if he is not classified as such.

The Companies Act[7] and SEBI Regulations[8] classify a promoter based on a self-declaratory approach and on the basis of control over the affairs of the company and dominion over the Board of Directors. Paytm claims that they have followed the legal procedures in classifying Mr Sharma as a non-promoter. However, the test of being a promoter is not limited to simply being ranked as one in the offer document or Annual Return. A critical test is the test of “Control”[9] which includes the right to appoint a majority of the directors or to control the management or policy decisions of the company, directly or indirectly.

The Articles of Association of One 97 Communications Limited grant Mr. Vijay Shekhar Sharma the right to a permanent seat on the Board, the right to nominate a person to the Board etc., which mimic the entrenchment rights enjoyed by promoter families in traditional Indian companies. Hence, it is not a stretch to argue that Mr. Sharma enjoys rights akin to promoters and therefore should be treated as such. It should also be noted that the term “control” is given an inclusive definition and not an exhaustive one, which paves way for the expansion of its scope to cases such as the one in hand.

This could be a wake-up call to the Regulator SEBI to realise that the classification of promoter is not to be left to the discretion of the companies themselves and the test of control should not be a one-time test administered at the time of the IPO, but one that must be done periodically.

Kavya Das R

(The Author is a qualified legal professional and pursuing the final program of ICSI)


[1] Section 62(1)(b) of the Act read with Explanation to Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014

[2] Regulation 2(1)(i) of the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 and Regulation 2(1)(o) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018

[3] Explanation to Rule 12(1) of the Companies (Share Capital and Debentures) Rules, 2014 (inter alia) For the purposes of clause (b) of sub-section (1) of section 62 and this rule ‘‘Employee’’ Means… but does not include… (ii) a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.

[4] Section 2(11) of the Companies Act, 2013

[5] Daman Singh and Ors. V. State of Punjab and Ors. AIR 1985 SC 973

[6] Section 2(77) of the Companies Act, 2013 read with Rule 4 of the Companies (Specification of definitions details) Rules, 2014 classifies the following as relatives · members of a Hindu Undivided Family; husband and wife; father and mother including step-father and step-mother, son (including stepson) and daughter, and their spouses, brother and sister

[7] Section 2(69) of the Companies Act, 2013

[8] Regulation 2(1)(oo) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 and Regulation 2(1)(cc) of the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021

[9] Section 2(27) of the Companies Act, 2013 and Regulation 2(1)(e) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 “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: Provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position;

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Mido Reigh
Mido Reigh
May 12, 2023
Rated 5 out of 5 stars.

Useful article. Well explained

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