Paytm shares sink 9% on reports of Sebi's show cause notice to Vijay Sharma

Shares of One 97 Communications plunged 8.88 per cent at Rs 505.25 per share on the BSE after reports emerged that the company's Founder, Vijay Shekhar Sharma has been served show cause notice by Sebi

Shares of One 97 Communications plunged 8.88 per cent at Rs 505.25 per share on the BSE after reports emerged that the company’s Founder, Vijay Shekhar Sharma has been served show cause notice by the top market regulator.  

According to a Moneycontrol report, the Securities and Exchange Board of India (Sebi) has issued show-cause notices to Vijay Shekhar Sharma, founder of One97 Communications, Paytm’s parent company. 

"The notice has also been served on the former board members who were involved in its November 2021 IPO. The notices concern alleged misrepresentation of facts and non-compliance with promoter classification norms," the Moneycontrol report quoted people aware of this matter as saying. 

Business Standard could not independently verify the report. One97 Communications, on its part, too, has not issued any clarification so far.

This probe follows inputs from the Reserve Bank of India (RBI), which reviewed Paytm Payments Bank earlier this year.

Per the report in the media, the main issue is whether Sharma should have been classified as a promoter, given his management control rather than an employee role during the IPO.

Unless a company is classified as ‘professionally managed,’ it is typically considered promoter-driven. To be deemed professionally managed, no single shareholder should hold more than a 10 per cent stake, and no one should wield control.

In Paytm’s case, prior to the IPO, founder Vijay Shekhar Sharma transferred 5 per cent of his shares to VSS Holdings Trust, reducing his stake from 14.6 per cent to 9.6 per cent, just below the 10 per cent threshold. Despite this, Sharma retained significant control through his board position and management role, the report added.

“Additionally, in August 2023, Sharma acquired a 10.3 per cent stake in Paytm through Resilient Asset Management BV, another entity owned by him. This stake was classified under ‘Foreign Direct Investment’ rather than being aggregated with Sharma’s other holdings,” the report said. 

Sebi has also questioned the company’s directors for supporting Sharma's stance. Notably, Sebi regulations also prohibit promoters from receiving employee stock options (ESOPs) after an IPO, which may have impacted Sharma’s eligibility for such options.

Earlier in January this year, the Reserve Bank of India had barred Paytm Payments Bank from taking fresh deposits. The RBI action was led by persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action, the RBI had said. 

At 02:26 PM the shares of the company were trading 4.06 per cent lower at Rs 532 per share on the BSE. By comparison the BSE Sensex was up 0.83 per cent at 81,760 levels.