Shareholders oppose India’s crop of newly listed tech groups

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It’s been a humbling year for Indian tech companies, and particularly for billionaire Vijay Shekhar Sharma, the founder of burgeoning fintech group Paytm.

Paytm has become a focal point of frustration for many investors over the past 18 months with a slew of companies joining the stock market.

The much-anticipated listing in November was controversial as shares fell after the initial period, sending its market value down from $20 billion at the initial public offering price to around $6 billion. The company continues its financial hemorrhaging, with losses nearly double to Rs6.4bn ($81mn) in the quarter ended June a year ago. And it faced scrutiny from regulators this month when law enforcement officials raided Paytm’s offices in an investigation into illegal Chinese loan providers. (Paytm denies any impropriety, saying the probes were linked to entities other than an independent group.)

The investor’s displeasure at the company last month prompted proxy advisers to recommend against appointing Sharma as CEO and against his pay package, saying he had consistently failed to deliver on his promise to be profitable.

Institutional Investor Advisory Services (IIAS), one of the proxy advisers, noted that Sharma’s annual remuneration of Rs8bn ($101mn) was higher than that of CEOs of companies in the Bombay Stock Exchange’s Sensex index and that he did not disclose investor information. The share options are “not aligned with the interests of the shareholders”.

Sharma survived the scandals, thanks in part to the help of longtime investors like SoftBank and Alibaba, who hold most of the equity with the founder. But in a sign of the extent of other shareholders’ concerns, most public institutions voted against the payment.

Sharma defended his company, reiterating that Paytm is building world-class technology. But the experience should be a wake-up call for India’s listed tech companies. Since Paytm went public last year, investors have been growing weary of inconsistent messaging and profitability.

Last year’s new era of IPOs was a historic one for Indian tech. The start-up sector is thriving, with billions of dollars poured in by foreign capitalists into India’s tech talent and large upwardly mobile population.

The first opportunity for the general public to participate in that growth was Zomato, a food delivery group and household name list in July 2021. Its shares doubled in value months later, when co-founder Deepinder Goyal told investors the IPO would “inspire millions of Indians to dream big.” Beauty ecommerce group Nika and SoftBank-backed insurance aggregator PolicyBazaar followed with well-received listings.

But the Paytm IPO helped usher in a major turnaround. Investors, surprised by the high valuation, have questioned whether the company has a meaningful edge over many digital payments competitors. The global environment has also changed recently and Indian tech stocks are now trading at a steep discount, with Zomato down 60 percent from its November peak. While the shares were partly victims of the global tech boom, the selloff fueled uncertainty about the companies’ business models and management styles.

Zomato, for example, is struggling with challenging unit economics and slowing user growth. The group’s approach – which plans to restructure and rebrand the parent company as “Eternal” – has declined to hold quarterly earnings calls before reversing course after initial backlash from management, unclear to analysts.

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

Although they survive the sounds, Sharma can’t be too comfortable. Now Paytm says it will be “operationally” profitable by September 2023. With him and his partners in control, it could bring in more outside investors when the shareholder lock-up period expires in November. He could not meet the target again.

benjamin.parkin@ft.com

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