From IPO Debacle to RBI Rap, What Went Wrong With Paytm?

On Monday, after RBI curbs, the share fell 13 percent to an all time low of Rs 672.

Reserve Bank of India (RBI) on Friday directed Paytm Payments Bank Ltd to stop onboarding new customers with immediate effect, due to certain “material supervisory concerns."

(Photo: The Quint/Deeksha Malhotra)

After commanding India's largest initial public offering (IPO) in November, the share price of One 97 Communications Ltd, Paytm's parent company, tanked on debut.

Paytm has been struggling ever since. On Monday, 14 March, the share price fell 13 percent to an all time low of Rs 672, a 65 percent decline from the listing price of Rs 2,150. The share price declined another 10% or so by midday Tuesday.

This came after the Reserve Bank of India (RBI) on Friday directed Paytm Payments Bank Ltd to stop onboarding new customers with immediate effect, due to certain “material supervisory concerns."

Reports emerged that the RBI did this because of alleged data leaks to Chinese firms which reportedly own about 27 percent of Paytm. The company has denied this.

Here's a look at what's plaguing Paytm:

Trouble With RBI

In a statement on Friday, under section 35A of the Banking Regulation Act, 1949, the RBI directed Paytm Payments Bank Ltd (PPBL) to stop onboarding of new customers.

"The bank has also been directed to appoint an IT audit firm to conduct a comprehensive System Audit of its IT system," it said. The RBI has said that it will only lift the curbs after reviewing the audit report.

Paytm Payments Bank said that it was taking immediate steps to comply with RBI directions and working with the regulator to recommence the opening of new accounts. It has promised a seamless experience for existing customers of their payments bank.

This isn't the first time that the payments bank has been the subject of RBI scrutiny. PPBL was slapped with a Rs 1 crore penalty in November 2021 for deficiencies in regulatory compliance information.

According to the central bank, on examination of the PPBL's application for issue of final 'Certificate of Authorisation' (CoA), it was observed that the submitted information did not reflect the "factual position".

In June 2018, the RBI had prohibited Paytm Payments Bank from opening any new accounts due to supervisory concerns. These restrictions were lifted in December 2018.

However, veteran business journalist Madhavan Narayanan, who bought Paytm shares around the Rs 900 mark, thinks that this is par for the course.

"It is normal for regulators to crackdown on some of the issues related to technology," he said, pointing to RBI's eight month ban on HDFC bank issuing new credit cards in 2021.

Data Sent to Chinese Investors: Report

In its statement, the RBI hasn't mentioned what the "certain material supervisory concerns" are.

However, a Bloomberg report suggests that Paytm Payments Bank was barred from taking on new customers because it allowed data to flow to servers abroad and didn’t verify its customers properly.

RBI, in its annual inspection, found that PPBL’s servers were sharing information with Chinese entities that indirectly own a stake in the payments bank, the report said, quoting a person familiar with the matter.

The company had also onboarded thousands of clients without adequate know-your-customer documentation and the concern was that some of these could have been mules for money laundering, the report added.

China's ANT Group holds a 24.7 percent share in Paytm while Alibaba holds 2.4 percent, according to Business Insider.

Paytm has denied the claims and has called the Bloomberg report "false and sensationalist." It said on Twitter that it is fully compliant with RBI's directions on data localisation.

"Even if there is a security angle, it is unlikely that there was a wilful sharing of confidential data affecting national security," said Narayanan.

He added that if the government takes a long term stand that Chinese investments are to be frowned upon, Paytm's chinese investors will suffer, not its customers or Indian investors.

Banking Dreams Foiled?

Paytm Payments Bank was considering applying to the RBI for a small finance bank (SFB) licence by June 2022 – a much needed upgrade from its payments bank status – according to Moneycontrol.

RBI's guidelines allow payments banks to convert into an SFBs after the completing five years of operations. However, Paytm's three regulatory breaches in as many years might have ruined its chances to get the licence.

Financial services group Macquarie has reportedly suggested that the recent developments "substantially reduce" Paytm’s chances of upgrading.

Payments banks work like regular banks but are not allowed to give out any loans or issue credit cards. They also can't accept any fixed or recurring deposits or deposits above Rs 2 lakh.

They are also required to park a certain percentage of their deposits in government securities or Treasury Bills as well as fixed deposits with commercial banks.

They earn money through transaction fees and lending via partnerships with banks and non banking financial corporations. Without the money generated from lending, the margins are razor thin, which has led some to believe that the payments bank model isn't viable.

IPO and Profitability Woes

After a spectacular IPO listing, Paytm, within two months, erased more than half its value on the stock market. Due to the initial over valuation, the market expected a correction in the stock price, but not to this extent.

"It is very unlikely in my opinion that a company would be priced beyond acceptable levels during an IPO. Paytm's shares have fallen (around) 70 percent from the original value and that seems like too much of a stretch," said Narayanan.

He doesn't feel that the nearly 70 percent share plunge is justified given Paytm's subscriber base of more than 50 million.

"It is market leadership, along with brand value, that can acquire a strategy as it goes along. From that point of view, the share plunge doesn't seem justified enough," he said.

Being a digital wallet and a payments bank gives Paytm immense strategic value for companies looking to expand their customer base, which could make it a target for acquisitions, suggested Narayanan.

Despite its widespread adoption and public recall, Paytm remains a loss making company. For the third quarter ending of financial year 2021-22, Paytm reported a consolidated net loss of Rs 778 crore, up significantly from Rs 482 crore in the September quarter.

Revenue from operations, however, jumped 89 percent to Rs 1,456 crore.

Paytm Founder Arrested

Another incident that could be affecting market sentiment is the recent arrest of Paytm CEO Vijay Shekhar Sharma by the Delhi Police for allegedly ramming a car into the vehicle of a Deputy Commissioner of Police (DCP), on 22 February.

He was booked for rash or negligent driving under the Indian Penal Code (IPC) section 279, and subsequently released on bail.

The First Information Report (FIR) states that a Jaguar Land Rover, allegedly driven by Sharma, had hit the vehicle of DCP (South District) Benita Mary Jaiker outside The Mother’s International School on Aurobindo Marg in New Delhi.

Sharma holds 51 percent stake in Paytm Payments Bank while the remaining 49 percent is held by Paytm.

Narayanan, however, feels that such an incident shouldn't affect the stock price, "Paytm is no longer a startup, its size is huge and it has got significant investors... it has crossed the stage where its share valuation should be determined by an individual's actions."