Shareholders challenge India’s new crop of listed tech firms

It has been a humbling year for a new crop of Indian technology companies and for Vijay Shekhar Sharma, the billionaire founder of flagship fintech group Paytm, in particular.

Paytm has become a focal point for many of the investor frustrations with the cohort of companies that has joined the stock market in the past 18 months.

Its much-awaited listing in November was a debacle with shares plunging after debut, sending its market value from $20bn at the initial public offering pricing to current levels of around $6bn. The company has continued to bleed financially with losses nearly doubling to Rs6.4bn ($81mn) in the quarter ending in June from a year earlier. And it has faced scrutiny from regulators, while law enforcement officials this month searched Paytm offices in an investigation of illicit Chinese loan providers. (Paytm denies any impropriety, saying the searches were related to independent, non-group parties.)

Investor discontent with the company prompted proxy advisers last month to recommend that shareholders vote against reappointing Sharma as chief executive and against his pay package, arguing that he has consistently failed to fulfil pledges to become profitable.

One of the proxy advisers, Institutional Investor Advisory Services (IIAS), noted that Sharma’s annual remuneration of Rs8bn ($101mn) was higher than all chief executives of companies in the Bombay Stock Exchange’s Sensex index and that the lack of disclosure on the vesting of share options displayed “no alignment with the interests of shareholders”.

Sharma survived the votes, thanks in part to the help of longtime investors such as SoftBank and Alibaba, which along with the founder hold most of the equity. But in a sign of the extent of the concerns of other shareholders, the majority of public institutions voted against his pay.

Sharma defended his company, reiterating that Paytm was building world-class technology. But the experience should be a wake-up call for India’s listed tech companies. Since Patym went public to much fanfare last year, investors are growing tired of inconsistent messages and struggles to turn a profit.

Last year’s new-age IPOs marked a historic moment for Indian tech. The start-up sector thrived, with billions of dollars pouring in from foreign venture capitalists drawn to India’s tech talent and large, upwardly mobile population.

The first opportunity for the wider public to participate in that growth was the listing in July 2021 of Zomato, a food delivery group and household name. Its shares doubled from their issue price in the months after, with co-founder Deepinder Goyal telling investors that he hoped the IPO “inspires millions of Indians to dream bigger”. Beauty ecommerce group Nykaa and SoftBank-backed insurance aggregator Policybazaar followed with well-received listings.

But Paytm’s IPO helped trigger a big reversal. Investors baulked at its high valuation and questioned whether the company had a meaningful edge over its many digital payment competitors. The global environment also soon turned and India’s tech stocks are now trading at steep discounts, with Zomato down 60 per cent from its November high. While the stocks are of course partly victims of the global tech rout, the sell-off has exacerbated unease over the companies’ business models and management styles.

Zomato, for example, has struggled with challenging unit economics and slowing user growth. The approach of the group — which plans to restructure and rebrand its parent company as “Eternal” — to transparency also unnerved analysts, with management initially declining to do quarterly earnings calls before reversing course after a backlash.

But there have been some improvements in the sector, with Zomato reporting higher revenues and smaller losses in its June quarter earnings. But Amit Tandon, IIAS’s co-founder, points to a concerning divide between founders and their private equity backers on the one hand and public investors on the other. “The governance standards for a lot of these public-market investors are higher than what we see in the private equity space,” he says. Even as newcomers vote for change, private equity firms seem “happy to keep the founder who helped them make so much money humoured”.

Despite surviving the votes, Sharma cannot get too comfortable. He now says Paytm will become “operationally” profitable by September 2023. While he and his allies remain in control, the end of a shareholder lock-in period in November could lead to more outside investors coming in. They may prove less forgiving if he fails to meet the target again.

benjamin.parkin@ft.com