This is because the Reserve Bank of India (RBI) has directed the group's Paytm Payments Bank (PPBL) to suspend most of its operations - such as accepting new deposits, executing credit transactions, and allowing consumers to top up their accounts—after February 29 due to repeated non-compliance.
One97 Communications (OCL), Paytm's parent firm, controls 49% of PPBL, with Sharma, the largest owner, holding the remaining shares. The RBI's differentiated licensing model permits payments banks to accept current and savings deposits and offer payment products, but no lending is permitted.
Furthermore, both entities, OCL and PPBL, have tight economic relationships. The parent company's Paytm app provides a variety of payment options from Paytm Payments Bank, including Wallet, Paytm UPI, FASTag, and fixed deposits.
As RBI Governor Shaktikanta Das noted following a recent meeting of the central bank's monetary policy committee, Paytm breaches had been highlighted several times. He stated that when constructive engagement fails or the regulated organization does not take appropriate action, the RBI applies business restrictions. "Paytm should have corrected these issues two years ago, when RBI directed PPBL to stop onboarding new customers and appoint an IT audit firm to conduct a comprehensive system audit of its IT systems," a member of the banking industry said.
According to Santanu Agarwal, Deputy Managing Director at fintech startup Paisalo Digital, maintaining regulatory compliance is critical in today's ever-changing financial market. "By proactively strategizing and adapting to regulatory shifts, NBFCs (non-banking finance companies) can establish a resilient framework to ensure adherence to evolving standards," Agarwal said. The immediate result appears to be that Sharma's ambitions to establish a full-fledged bank have halted.
Will the RBI step in to replace the board after February 29? Paytm management, lead by Sharma, says that OCL and PPBL operate independently to meet banking governance norms. In FY23, the bank reported sales of '3,285 crore and earnings of '15 crore. It has total assets of '9,843 crore' and deposits of '3,285 crore'.
However, it is worth mentioning that Sharma serves as PPBL's part-time Chairman, while Bhavesh Gupta, Paytm's current President and COO, is a Director on the bank's board. Similarly, Srinivas Yanamandra, Group Head of Regulatory Affairs & Policy at the parent firm, is also a director of the bank. Two independent directors have already deserted the ship.
OCL, the holding firm, is already facing a margin reduction of '300-500 crore in its annual Ebitda. When the corporation begins to relocate PPBL's customers, it will face difficulties in negotiating favorable terms with other banks. Madhur Deora, OCL's CFO and Additional Whole-time Director, recently voiced optimism, saying, "Over time, we will be able to significantly offset this impact."
Will investors purchase this? OCL's stock price is already trending downward. It has fallen 41% after the RBI's intervention. The stock, which was selling at roughly '428 per share on February 12 with a market capitalization of around '27,000 crore, had a rocky start following its IPO, when shares were priced between '2,080-2,150.
Sharma will be concerned about institutional investors. While domestic institutions, particularly mutual funds, possess approximately 5%, foreign institutions own the majority, or 45%. "Some may exit since the future appears dismal. A merger with a bank or non-bank financial institution is also an option, according to a market insider. The market was buzzing with reports of Jio Financial acquiring Paytm's wallet business. However, both OCL and Jio Financial have refuted this. OCL is now preparing for a future beyond PPBL. It has established a three-member advisory committee, led by former Sebi chairman.
M. Damodaran will strengthen corporate governance
OCL, the payments aggregator, may buy both online and offline merchants. Operationally, the framework for sharing rewards in person-to-merchant (P2M) transactions must now be renegotiated with new banks. "As a payments aggregator for online and offline merchants, OCL has been collaborating with various banks over the past two years, with PPBL being one of the primary partners," Paytm said in a statement. The difficulty today is to migrate existing merchants, particularly offline vendors, from PPBL to another bank.
Paytm President and COO Gupta recently stated that conversations would also take place with regulators and the National Payments Corporation of India. Sharma informed investors that the company is actively lowering its reliance on PPBL, despite the fact that there is still a large exposure. "It's important to highlight that these relationships are primarily payments-related, implying that all banks possess the necessary technology and capabilities," he went on to say.
In addition, OCL is transferring nodal account - special purpose accounts set up to receive money from banks - to other large commercial banks. These are extremely profitable because of the large amounts of money that move through them. Sharma and his colleagues are racing against time. They need to work quickly to address the Reserve Bank of India concerns.
