INTRODUCTION
In contemporary corporate structures, ESOPs have emerged as a prevalent mechanism to incentivise employees and retain key talent by awarding them an equity stake in the future growth of the company. Preferably, ESOPs are intended to align the interests of employees with those of shareholders, promoting long-term value creation. However, when misused, they can emphasise transparency and erode the basic principles of corporate governance.
The recent SEBI settlement involving One97 Communications Ltd., commonly known as Paytm, and its founder, Vijay Shekhar Sharma, sparked critical discourse surrounding ESOP governance in publicly listed companies. In May 2025, SEBI issued a settlement order addressing irregularities in the grant of stock options to Sharma, although his designation as a promoter allegedly violated regulatory norms[1].
This paper critically analyses the legality of the ESOP grant in question, SEBI’s adjudicatory and settlement approach, and the broader implications for corporate governance in India. The controversy highlights challenges in regulatory enforcement, while underscoring the need to reassess accountability mechanisms applicable to promoters of listed entities.
Significantly, the case has brought to the fore key governance questions regarding the grey areas in ESOP allocation, specifically within high-profile corporations. This analysis will evaluate whether SEBI’s settlement in this instance upholds the spirit of regulatory discipline or inadvertently sets a lenient precedent that could dilute deterrence in future violations.
BACKGROUND OF THE ONE97 COMMUNICATIONS-SEBI CASE
SEBI alleged that the founder and promoter of One97 Communications Ltd., Vijay Shekhar Sharma, was ineligible to be granted ESOPs under widespread regulations. Although Vijay Shekhar Sharma received stock options through the company’s Employee Welfare Trust. This was seen as a direct contravention of the SEBI Regulations, 2021, which explicitly forbid promoters and the promoter group from receiving stock options post-listing, unless under very specific permissible schemes.
In response to the allegations, both Vijay Shekhar Sharma and One97 Communications chose to settle the matter with SEBI without admitting or denying any wrongdoing, as permitted under SEBI’s settlement regulations. Each party paid ₹11.1 million as a settlement amount. Additionally, SEBI implemented a restriction on Sharma, barring him from receiving ESOPs from any listed company for 3 years. This development is suggestive of SEBI’s increasingly vigilant stance on the misuse of governance mechanisms in listed entities and its commitment to supporting regulatory compliance, especially concerning promoter conduct.
RELEVANT LEGAL FRAMEWORK
- SEBI Regulations, 2021:
Regulation 2(1)(t) of the SEBI (SBEB & SE) Regulations, 2021[2], describes an “employee” for eligibility of ESOP, excluding promoters and directors holding more than 10% equity. This exclusion is grounded to ensure that employee benefit schemes remain incentive tools for bona fide employees, not controlling shareholders. The fundamental intent is to maintain fairness and integrity in corporate compensation practices in listed companies. Any attempt to circumvent these provisions by manipulating designations will likely be seen as a violation of the spirit of the regulation.
- Companies Act, 2013:
Section 2(87) of the Companies Act, 2013[3] defines a “promoter” broadly to include not just formal designates but also those exercising “control” over company affairs. Control is ideologically understood as the ability to influence board decisions or corporate policy, even after not having an official title. This expands the eligibility scrutiny under ESOP schemes. It aligns with corporate jurisprudence that favours substance over form to identify fiduciary relationships, especially where benefit schemes may be misused.
- SEBI Act, 1992:
Section 11 of the SEBI Act, 1992 vests SEBI[4] with broad powers to protect investors and regulate securities markets. Courts have construed this provision expansively, allowing SEBI to intervene proactively and remedially in cases of failure in governance, including wrongful ESOP allotments. These powers are the support of SEBI’s enforcement framework in corporate misconduct cases.
ISSUES INVOLVED
- Whether the Grant of ESOPs to a Promoter Violated SEBI Regulations:
The primary concern is whether ESOPs granted to Vijay Shekhar Sharma contravened Regulation 2(1)(t) of the SEBI (SBEB & SE) Regulations, 2021. Even after not being a formally named promoter at the time, Sharma held over 10% equity and implemented effective control, thus qualifying as a promoter under Section 2(87) of the Companies Act, 2013. Such control disqualifies him from ESOP benefits, making the grant a likely violation.
- Whether Paytm Failed in Its Statutory Compliance Duties
Paytm, as a listed entity, was required to ensure full compliance with SEBI norms. Its failure to avoid the ESOP grant to an individual who is not eligible suggests non-compliance and a violation of fiduciary duties under Section 11 of the SEBI Act, 1992[^3].
- Whether Internal Committees Failed in Oversight:
The inaction of the Compensation and Audit Committees indicates fragile internal governance. Their failure to flag the breach undermines regulatory oversight and corporate accountability.
IMPACT ON CORPORATE GOVERNANCE
The SEBI settlement order involving One97 Communications Limited reinforces the statutory ineligibility of promoters under Regulation 2(1)(t) of the SEBI Regulations, 2021, in affirming that regulatory compliance isn’t contingent upon the corporate stature of an individual or historical contributions. The case emphasises the fiduciary responsibility of governance bodies, especially the audit committees and independent directors, under Section 177 of the Companies Act, 2013[5], and the SEBI Regulations, 2015, to implement proactive oversight over employee benefit schemes.
Crucially, the order reemphasises that shareholders in listed entities are legally entitled to timely and accurate disclosures under Regulation 30 and Schedule III of the SEBI LODR Regulations. Non-disclosure of preferential ESOPs to promoters who are not eligible constitutes not only a procedural failure but a substantive breach of equitable governance principles and transparency obligations. So, the regulatory action serves as a legal reaffirmation of the core tenets of Indian corporate governance.
JUDICIAL RESPONSE AND SETTLEMENT APPROACH
The matter was solved under the SEBI Regulations, 2018, via a denial settlement, in which adjudicatory proceedings were prevented. This fits with the doctrine of consent orders that is recognised in administrative law, which gives permission for enforcement through binding settlements without admission of guilt, equilibrating deterrence with procedural efficiency[6].
While SEBI implemented a three-year bar on Mr. Vijay Shekhar Sharma’s ESOP eligibility, critics debate that reliance on settlements in high-profile governance cases may weaken the normative force of securities regulation. The lack of a reasoned finding risks interpretations of regulatory leniency and weakens the transparency responsibilities under the SEBI Act, 1992.
COMPARATIVE INSIGHTS
The regulation of Employee Stock Option Plans (ESOPs) forms a crucial aspect of corporate governance throughout jurisdictions. In the US, the Securities and Exchange Commission (SEC) commands robust disclosure norms under the Securities Exchange Act of 1934, especially Rule 10b-5, which forbids material misstatements in securities filings. The case of US v Gregory Reyes (2007) emphasises the criminal liability arising from the backdating of stock options without the approval of the board, resulting in executive compensation misstatements and shareholder deception[7].
In India, ESOPs are governed by the SEBI Regulations, 2021, and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015[8]. The SEBI settlement order, including One97 Communications Ltd. (Paytm), highlights regulatory concerns over the grant of ESOPs to promoters without prior shareholder approval, in contravention of Regulation 6(1), and non-disclosure in offer documents, breaching Regulation 7(2) of the SEBI (ICDR) Regulations, 2018[9].
While U.S. enforcement includes both civil and criminal proceedings, India’s regime remains primarily administrative, depending on adjudication, penalties, and settlement under Section 15T of the SEBI Act, 1992. Although the Paytm matter reflects a discernible shift towards stricter enforcement and enhanced fiduciary accountability, it aligns the regulatory posture of India with evolving international standards in corporate governance[10].
ANALYSIS
The main issue in the Paytm-SEBI matter concerns the perspective of “eligible employee” under Regulation 2(1)(f) of the SEBI Regulations, 2021, which prima facie excludes promoters. The ESOP grant to Mr. Vijay Shekhar Sharma, therefore, constituted a transparent regulatory infraction[11].
Moreover, the use of an Employee Welfare Trust to route options to an ineligible promoter discloses a structural circumvention of regulatory intent.
To address such voids, SEBI may consider amending the 2021 Regulations to explicitly prohibit indirect or trust-mediated ESOP grants to persons who are not eligible, coupled with enhanced disclosure norms and independent oversight to ensure compliance and transparency.
CONCLUSION
The Paytm-SEBI settlement highlights vital regulatory oversights in the oversight of ESOPs,
particularly when routed through Employee Welfare Trusts. Though not a finding of guilt, the case reveals two systemic flaws:
- Regulatory Ambiguity: SEBI’s SBEBSE Regulations allow trust-based ESOPs, but lack guardrails that are clear, making transactions unclear, potentially transactions that are abusive.
- Weak Internal Oversight: Compensation Committees often fail to thoroughly monitor ESOP allocations, enabling indirect promoter benefits.
To make market integrity strong, three reforms are essential:
- i) SEBI must issue a descriptive circular on acceptable trust conduct, especially for secondary market purchases and sales.
- ii) Internal controls for Compensation Committees have to be tightened, along with mandatory independent audits of trust-linked ESOP activity.
iii) SEBI’s LODR norms must specifically codify promoter exclusions to prevent interpretational gaps.
iv) This case is a governance red flag. Without stronger legal clarity and oversight, ESOPs risk evolving as instruments of concealed enrichment instead of tools for genuine employee motivation.
Author(s) Name: Reshmi Khan (Heritage Law College, University of Calcutta)
References:
[1] Securities and Exchange Board of India, Settlement Order in the matter of One97 Communications Ltd and Vijay Shekhar Sharma (Order No SO/EFD-2/AA/15/2025, 15 May 2025).
[2] Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations 2021, reg 2(1)(t).
[3] Companies Act 2013 (India), s 2(87).
[4] Securities and Exchange Board of India Act 1992 (India), s 11.
[5] Companies Act 2013 (India), s 177.
[6] Securities and Exchange Board of India (Settlement of Administrative and Civil Proceedings) Regulations 2018, reg 3(2) (India).
[7] United States v Reyes, 577 F Supp 2d 1055 (ND Cal 2007).
[8] Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015, reg 17 (India).
[9] Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations 2018, regs 6(1), 7(2) (India).
[10] Securities and Exchange Board of India Act 1992 (India), s 15T.
[11] Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations 2021, reg 2(1)(f) (India).
