In March 2022, the Reserve Bank of India (RBI) asked Paytm Payments Bank Limited (PPBL) to stop onboarding new customers, taking action under section 35A of the Banking Regulation Act, 1949. Under this act, the central bank can take action or give directives in the public interest.
The RBI had also instructed the bank, where fintech giant Paytm’s CEO Vijay Shekhar Sharma holds the maximum stake, to appoint an IT audit firm to conduct a comprehensive system audit. This marked the beginning of a series of events that would significantly shape the trajectory of the financial entity.
Cut to February 2024, source-based reports suggest that the RBI is considering cancelling the bank's licence. This could mean an end to the bank’s business amid a crisis that Sharma is trying to fight.
This comes close on the heels of the RBI’s crackdown on the Paytm Payments Bank barring deposits into any customer accounts, prepaid instruments, wallets, FASTags, or NCMC cards after February 29.
While customers can use up the remaining balances from their accounts, the bank can’t carry out any other banking services.
A comprehensive system audit report, coupled with a subsequent compliance validation report by external auditors, brought to light persistent non-compliance issues and ongoing material supervisory concerns within the bank. These findings, considered substantial, prompted regulatory authorities to take further supervisory action.
The payment bank serves as the custodian for over 330 million wallet accounts. Notably, considering that the current monthly transacting users for Paytm stand at Rs 10 crore. The prior ban was centered on onboarding new customers, Paytm has the opportunity to leverage the extensive customer base within Paytm Payments Bank for the sale of payment and financial products. This strategic move allows Paytm to capitalize on the existing user ecosystem, potentially mitigating the impact of restrictions on new customer acquisition.
First set up in 2010 as an online mobile and DTH recharge platform, Paytm grew to be one of the most popular payment wallets and apps in India.
While the fintech company has been one of the most successful in the country, a deeper look reveals several governance issues.
— Concerning Related Party Transactions
PPBL is an associate of One 97 Communications Limited (OCL) where it holds a 49% stake and the rest is owned by founder Sharma. The controlling stake held by the CEO in a personal capacity has drawn attention from the government and regulatory bodies.
Though Sharma has said transactions with Paytm Payments Bank were at farm-length prices, there are concerns over related party transactions owing to its volume. For example, OCL paid Rs 782 crore to PPBL as payment processing charges and Paytm provided various services worth Rs 708 crore in FY23. PPBL has the highest share in the volume of related party transactions among all the related parties OCL deals with. OCL being an unregulated entity having a lot of interactions in terms of data sharing and other shared services with regulated PPBL prompted RBI to take these actions.
— Complex Transactions With Chinese Stakeholders
In August 2023, Ant Financial sold a 10% stake to Sharma’s Netherland-based entity Resilient Asset Management BV which in turn will issue optionally convertible debentures (OCDs) to Ant Financial. This is a complex transaction since it allows Ant Financial to convert those OCDs into equity again thereby they still retain economic interest. What remains unknown is at what price these OCDs will get converted into equity if not redeemed.
— Sharma’s Role
Proxy Advisor firm IIAS raised concerns that Sharma should be classified as a promoter based on his high remuneration, his powers in the company, and the stakes he holds.
Sharma holds a 19.4% stake — 9.11% through individual capacity and 10.29% through a foreign entity he owns called Resilient Assets BV. He holds another 4.88% stake through a proxy entity called Axis Trustees Services Limited which holds shares on behalf of the Sharma Family Trust. Just before the IPO, Sharma transferred 30 million shares to Axis Trustee Services Limited. This takes his real shareholding to 24%.
The Securities and Exchange Board of India, the Indian markets regulator, reportedly wanted to tweak regulations for startups to stop founders and family members from owning employee stock options through such routes.
— IPO Buyback And Sharma’s Remuneration
OCL completed a buyback of Paytm’s shares worth Rs 850 crore between December 2022 and February 2023. For a company like Paytm which has cash losses, it meant a return of capital to shareholders, pointed out IIAS.
An IIAS report also pointed out, “Paytm granted Vijay Shekhar Sharma 21 mn stock options in FY221 (larger than the size of the buyback announced on 13 December 2022). These stock options can be exercised at Rs. 9 per share: the fair value of stock options granted aggregates about Rs. 39.6 bn (USD 495 million2 ), which is higher than the compensation of all of S&P BSE SENSEX CEOs.”
Will Paytm Write Down PPBL Value?
PPBL is partly owned by OCL, Paytm’s parent company, with Paytm having a 49% stake and Sharma owning the rest. When a company's value decreases, it's called impairment. This can happen for various reasons, like financial problems or breaches of contracts. Paytm invested Rs 195 crore in PPBL, but with the RBI's notification essentially stopping PPBL's operations, there's a chance Paytm will need to lower the value of its investment because PPBL might not be worth as much anymore.
In a conference call with the management of OCL, Sharma said, “And from here on, we are very clear that we will work with only other banks and not PPBL. PPBL is just one of the various other banks. OCL has already been working with other banks for the last 2 years. And especially when the embargo had come to the payment bank, we had already started to work and accelerated the plan for movement to other banks and other banks have already started working with us.”
Paytm isn't interested in conducting any business using PPBL. Yet PPBL remains crucial for Paytm, as around 25% of its revenue comes from payment processing fees paid to PPBL, highlighting related party transactions.
Paytm’s Problems Have Existed For Years
Numerous allegations, including money laundering, KYC issues, related party transactions, and Enforcement Directorate raids, have surfaced against Paytm over the years. The company so far has only provided clarification about the raids. Despite claiming commitment to engaging with investors, Paytm has not addressed the other issues raised against them.
Paytm has faced RBI scrutiny over KYC norms and its relationship with OCL since 2018. In July 2021, it was issued a show cause notice for false information, leading to a ban on new customer onboarding in March 2022. The Enforcement Directorate raided Paytm in September 2022. It faced a Rs 5.39 crore fine in October 2023 and penalties in October 2021 and January 2024. Additionally, the National Highways Authority of India barred Paytm from issuing FASTags in January 2024.
Now, in a situation where Paytm is looking to tie up with other banks to keep its business afloat, its chequered past may be a hurdle.
While there have been reports that Jio Financial Services and even HDFC Bank could be in talks with Paytm, either would want to liaise with a clean business. Paytm’s record shows that’s not the case with them.
The RBI’s directive has practically killed Paytm’s wallet business. The only thing they have now is the data of 30 million wallet users. But that wouldn’t be enough to attract potential contenders.
In the recent conference call, Sharma claimed, “We are telling you that there is a dramatic improvement wherein one of the internal -- one of the audits from the regulator, it was said that we have seen material improvements. And that it was very humbling for me to hear, and there were many nice and positive words in different, different conversations. I do want to tell you that also.”
Sharma has not, however, clarified the corrective steps his company has taken to adhere to regulations, nor did it speak about what prompted RBI to take action against them. This shows that governance issues very much exist in the company.