upcoming initial public offering (IPO) showed.
This gives the founder sufficient buffer since he currently owns more than 9% of Paytm. These rights have been included in the new shareholding agreement (SHA) signed between Sharma and Paytm last month. As part of the new SHA, Sharma agreed to be no longer classified as the company’s ‘promoter group’.
While the new SHA has already come into effect, the proposal to give the Paytm founder protective rights in the fintech company after its listing must be ratified by shareholders. Top industry sources told ET that the proposal would be put up for voting at the first general body meeting after listing. They added that since all the existing investors, including Jack Ma’s Alibaba and affiliates (including Ant Financial) that own more than 30% of Paytm, agree with the proposal, its passage is unlikely to be contested.
Paytm didn’t respond to ET’s mailed queries.
“It is a well-established industry norm to give founder members rights linked to board nomination, subject to public shareholder approval,” said a person with direct knowledge of the matter. “In the current case, the shareholding of the founder is also significantly higher and, hence, the founder’s interests in the company need to be protected as well.”
The new SHA sets two conditions while defining Sharma’s rights post listing. The first is a minimum 2.5% ownership stake, while the second is Sharma’s continued engagement with Paytm in an executive capacity. If Sharma meets both the conditions, he has the right to appoint any person of his choice to the new board. However, if he falls short of any one condition, he will be able to only nominate himself to the Paytm board.
Sharma will altogether lose the right to board representation when both conditions — of prescribed minimum stock ownership and engagement in an executive capacity at Paytm — are no longer met.
Apart from the founder, Alibaba also gets one board seat. SoftBank Vision Fund and Elevation Capital (formerly SAIF), which own stakes in Paytm, can nominate one director each.
Separately, Sharma and a select group of other investors in Paytm also have the ‘rights to first offer’ if any of the existing shareholders seek to divest their stake in the company.
“The founder, investors and other series G investors have also agreed… to certain proposed transfers of shareholding, including providing inter se rights of first offer, rights of co-sale in certain transfers and drag-along rights,” said the IPO document of Paytm.
Several Indian consumer-technology startups, such as
Delhivery, are in various stages of finalising their public listings on Indian stock exchanges. Ahead of these high-profile IPOs, many in the startup industry are seeking regulatory safeguards that offer individual promoters greater flexibility in exercising operational control in the companies they founded — even after their public listings.
“Founders having special provisions to protect their boardroom interests can help maintain effective control even with a higher ownership in the company post listing by the institutional backers,” said a venture capital executive working with a startup that is planning a local listing. “There is a view in the industry that the market regulator should allow issuance of superior rights shares or dual-class shares to help founders protect their interests.”
Issuance of superior voting rights (SR) shares is considered one of the best safeguards in the global startup industry. SR shares confer higher voting rights on promoters than on ordinary investors. The Securities and Exchange Board of India (Sebi) had published guidelines for SR shares in 2019, but the framework is still considered ‘work-in-progress’ locally.
By contrast, issuance of SR shares and other categories of dual-class shares is common among the founders of Nasdaq-listed technology majors, such as Facebook, Google, Uber and Snap.
For instance, Facebook founder Mark Zuckerberg owns the majority of the voting rights in the social media platform due to a dual-class structure that weights certain shares over others. Similar dual-class structures to protect founders’ rights have also been deployed by Rupert Murdoch’s News Corp, ride-hailing startup Uber, and Google.