Mint explainer | How $600 million changed hands, but PhonePe saw none
They added that no new money was coming into the company and neither the founders nor the employees were taking cash off the table.
This is not a routine move, especially for a company ₹Experts said 11,000-12,000 crore initial public offerings (IPOs) have taken place.
Mint explains:
How was the deal structured?
General Atlantic’s stake rose from around 4.4% to 9% after it acquired shares from PhonePe’s Esop (employee stock option plan) pool in a secondary transaction. The funds were diverted not to finance operations but to help deduct and deposit fintech tax (TDS) due to employees exercising the options, the two people cited above said.
When an employee exercises Esops, the difference between the fair market value on that day and the exercise price is considered a taxable liability, i.e., part of his salary. As per Section 192 of the Income Tax Act, employers are required to deduct tax at source (TDS) on this amount.
Since TDS must be paid immediately and employees often do not have sufficient funds, companies sometimes arrange financing so that the tax can be deposited and employees receive only shares and not cash. In this case, the investor’s money was used only to meet the TDS liability. There were no primary raises, no operating cash inflows and no cash given to employees or founders, two people said on condition of anonymity.
Why is this a unique deal?
The aim, according to the two people, was to “clear” the Esop overhang before the IPO by helping employees convert options into shares and ensuring that the company can promptly pay TDS on these exercises.
This avoids the issuance of new shares that would dilute existing owners and does not drain the company of its own cash; This is useful when companies want their balance sheets to look strong before going public.
It is also faster. Primary fundraising takes time and increases the number of shares; A structured secondary can be executed faster and preserves business cash. Investors globally have long used such secondary services to help employees exercise options; But in India, experts said the approach is still new but is gaining traction among late-stage, IPO-oriented companies.
Ashima Obhan, senior partner at Obhan & Associates, corporate and intellectual property law firm, said from a governance perspective, such a transaction reflects a maturing Indian market where late-stage companies, especially those gearing up for IPOs, are keen to de-risk equity pools and ensure employees can participate without prohibitive cash outflows.
“While global markets have long used structured secondary vehicles to facilitate ESOP practices, in India this remains relatively new. Properly structured, it avoids dilution, maintains balance sheet strength and aligns investor appetite with employee retention,” added Obhan.
Hardeep Sachdeva, senior partner at corporate law firm AZB & Partners, said that although such regulations are still relatively new in the country, they aim to address the structural weakness in the ESOP regime that has long prevented employees from exercising early.
“If conducted with clear disclosures and fair valuations, they can empower management by showing that the company is proactively addressing employee engagement rather than leaving it to chance,” he added.
How can investors increase their stake in such a deal?
But the real question is how an existing investor can increase its ownership if the round is intended to fund Esop activities and TDS rather than issuing new shares.
Experts said that in practice, the investor’s stake may increase if he buys shares tied to the Esop pool; This can be done either by purchasing options that convert into new shares or by subscribing to new shares with the understanding that the proceeds will be used to settle outstanding options.
“There are several ways to do this,” Sachdeva said. “The investor can purchase the options directly from the employees (to be prepared and staged by the company), in which case the employees will receive cash or funds, while the investor will convert the options into shares in the company and increase its shareholding.”
Alternatively, the investor may inject funds into the company, acquiring shares of the company, and having a clear understanding with the issuing company that such funds will be used to repurchase all outstanding employee options.
“Now, in this case too, the money will eventually reach the employees and there will be an increase in the investor’s shares because the investor will receive additional shares,” he added.
How are PhonePe’s listing preparations going?
PhonePe filed for IPO confidentially with the Securities and Exchange Board of India (Sebi) in September; This was part of months of listing preparation, which included the appointment of JPMorgan, Citi India, Morgan Stanley and Kotak Mahindra Capital as bookrunners in February and its conversion into a public limited company in April this year.
The company also completed a multi-year restructuring: It moved its domicile from Singapore to India in 2022, paying approx. ₹8,000 crore tax.
Founded by Sameer Nigam, Rahul Chari and Burzin Engineer in 2015 and majority-owned by Walmart, PhonePe collected nearly $1 billion in donations from investors including General Atlantic and Tiger Global, and its value was around $12 billion in the 2023 round.
General Atlantic first invested in the company in January 2023, leading a $350 million tranche, and followed with additional $100 million in checks in April and May 2023 as part of the company’s $850 million round.
It reported revenue of this much on a consolidated basis for 2024-25: ₹7,148.6 crore, up 41% ₹5,064.1 crore in 2023-24. Expenses increased by 21 percent on an annual basis ₹9,394.1 crore. Consolidated loss after tax narrowed ₹1,727.4 crore ₹1,996.2 crore a year ago.
