Paytm Imbroglio: A Sense of Déjà Vu

– By Vipin Malik and Dr Manoranjan Sharma

“What’s done cannot be undone”.

– William Shakespeare, Macbeth (1606), Act 5, Scene I

The RBI allows payments banks, under its differentiated licensing scheme, to accept current and savings deposits and offer payments products without any lending. Of late, the basic distinction between the firm and the industry disappeared, reflected in the evocative phrase “Paytm karo” (do Paytm) and the transformed payments scenario because of the strategically significant initiatives of Paytm and Google Pay.

Paytm’s precipitous fall is generally attributable to dumping of shares by major investors, viz., Jack Ma’s Ant Financials, Alibaba Group, and SoftBank Group; huge cash needs and hefty losses, divided focus succinctly captured in Macquarie Capital’s report “too many fingers in too many pies” and disruptive Unified Payments Interface (UPI). Hence, in a sledge hammer move triggered by wanton and persistent noncompliance with established norms and material supervisory concerns, the RBI invoked sweeping powers vested in it in terms of Section 35 of the Banking Regulation Act 1949 to bar the Paytm Payments Bank Limited (PPBL) from:

(i) No further deposits, credit transactions, or top-ups shall be allowed in any customer accounts, prepaid instruments, wallets, FASTags, National Common Mobility Cards (NCMC) etc. after February 29, 2024.

(ii) Withdrawal or utilization of balances by its customers from their accounts including savings bank accounts, current accounts, prepaid instruments, FASTags, NCMC, etc. are to be permitted without any restrictions, up to their available balance.

(iii) No other banking services, other than those referred to in (ii) above, like fund transfers (irrespective of name and nature of services like AEPS, IMPS, etc.), BBPOU, and UPI facility should be provided by the bank after February 29, 2024.

(iv) Nodal Accounts of OCL and PPBL are to be terminated at the earliest, in any case not later than February 29, 2024.

(v) Settlement of all pipeline transactions and nodal accounts (in respect of all transactions initiated on or before February 29, 2024) shall be completed by March 15, 2024, and no further transactions shall be permitted thereafter.

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Slew of charges against Paytm

Let us do some data crunching for a comprehensive assessment and perspective: 90 million Paytm users, 15 million unique Paytm users, 100,000 unique users of Paytm received DBT in 6 months; 31.5 million SB accounts with PPBL, 14 million dormant or frozen accounts; 350 million Paytm PPBL wallets, 300 million accounts with zero balance, 50 million active accounts with balance.

The catalogue of charges against Paytm cover a wide ground. Such charges include major irregularities in the KYC process, purported manipulation of the customer base, linking the same PAN for on-boarding multiple customers, conducting transactions transcending the set limits suggestive of money laundering, etc. While the jury may be out on the vexed issue of FEMA violations, there is incontrovertible evidence of flouting of KYC norms with a single PAN linked to 100 customers and in some cases to even over 1000 customers. This deplorable situation is reminiscent of the Shakespearean aphorism, “something is rotten in the state of Denmark” (Hamlet, Act 1, Scene IV).

Regulatory Action

The RBI had earlier imposed a fine of ₹ 5.39 crore over non-compliance of its licensing guidelines, enhancing maximum day-end balance, cyber security framework, and securing mobile banking applications, including UPI ecosystem. Carrying forward this action, the RBI unleashed a slew of regulatory measures listed above, thereby causing an existential crisis. Larger issues of the macro-economy, consumer protection, the lackadaisical role of the board of directors, board dynamics and due diligence and accountability of auditing firms with punitive measures in cases of financial mismanagement, fraud, and corporate failures were also increasingly highlighted in the Paytm meltdown.

Some news items even suggested that the RBI had asked Directorate of Enforcement (ED) to check suspected PPBL breaches. No wonder, then, the shares of Paytm had a free fall steeply dipping over 40% in the aftermath of the regulatory whiplash (the scrip tumbled to ₹ 428 from the high of ₹ 2,150 post the IPO).

Extensive Concerns and Consternation

One97 Communications (OCL), the parent company of Paytm, owns 49% equity in PPBL, with Vijay Shekhar Sharma accounting for the balance 51 %. There are also inextricable business linkages between OCL and PPBL. The parent company’s Paytm app offers various payments instruments, viz., Wallet, Paytm UPI, FASTag, and fixed deposits from Paytm Payments Bank. The stern regulatory action, which effectively banned PPB’s operations, not only brusquely jolted Paytm but also caused trepidation in India’s broader fintech industry ecosystem manifested in the closure of startups, viz., Coinome, Throughbit, Koinex, and Muvin and discernible business deceleration in case of Slice, Jupiter, PayU, and Instamojo. Such concerns included stifling innovation, high compliance cost, reduced inflow of foreign and domestic investments, hit on digital transactions, closure of several fintech start-ups, and destruction of hard-earned money of end-consumers. These and other aspects require balanced regulation to prevent value/investment erosion and reduced ease of doing business.

Compliance in letter and spirit- The Holy Grail

There seems to be widespread agreement that repeated non-compliance with statutory requirements and regulatory prescriptions, flouting of the RBI directives and repeated contravention of the rules brooks no soft-pedalling and have clearly to be non-negotiable. Historically, the RBI’s accent has been on licensing and greater supervisory rigor and subjecting fintech products to the customary regulatory instruments and mechanisms. Given the cognisable dilemmas, there could be a case for a more nuanced approach of the RBI to foster innovation within the regulatory sandbox in sync with new-age regulators to influence fintech. While innovation is certainly necessary, particularly in the fintech ecosystem, innovation must occur in accordance with the rules of the game.

The issue of greater compliance cost has evoked protracted discussions but it has to be realized that any short-cut, any laxity or pursuit of “creative” banking or other policies could lead to a regulatory quagmire and even conceivably mean the difference between make and mar as starkly reflected in the cases of Zee, Byju’s, Paytm, Religare, etc.

In a limited holding-up operation, Paytm partly salvaged the situation by opening an escrow account with Axis Bank to “…ensure seamless merchant settlements as before”. This move, which was initiated in conformity with the RBI stipulation, meant that Paytm QR codes, soundboxes and card machines will continue to be operational after the revised March 15 deadline (earlier February 29) provided the merchants migrated to other banks. This measure is significant since 330 million Paytm wallets were used for daily transactions.

Evolving roller-coaster ride

RBI Governor Shaktikanta Das said on March 6, 2024 that the time up to March 15 is sufficient because 80-85 % Paytm wallets are linked to other banks, and the remaining 15 % have been advised to move on to other banks.

Shareholders of PPBL have mutually agreed to simplify the Shareholders Agreement (SHA) to support PPBL’s governance, independent of its shareholders, One 97 Communications (OCL). OCL shares rose smartly 4% to ₹ 420 after Paytm and Paytm Payments Bank agreed to discontinue inter-company agreements. Meanwhile, SoftBank Group sold 2.2% stake amid regulatory uncertainty. Still all is not lost and Paytm may surmount regulatory headwinds to emerge as a strong company. Stiffer regulatory enforcement is, however, also manifested in JM Financial being in RBI’s crosshairs after Paytm and IIFL Finance.

The FM met top executives from leading fintech firms, e.g., Amazon Pay, Zerodha, Cred, LendingKart on March 1, 2024. While no Paytm-related anxiety or concerns were flagged, the FM directed the RBI to hold monthly meetings with fintech companies to assuage regulatory concerns.

Seismic Changes-Pathway to the Future

While the going was good, the major players had a ball with Paytm recording a meteoric rise and the marketing and branding initiatives leveraging cashless payments to script history. But it was too good to last and the business model was clearly unsustainable in the medium term. And, therefore, fail it did- but what caused considerable disquiet was that it was not a minor fall but a free fall with devastating consequences not just on the individual entity but also on the larger ecosystem.

Viewed thereof, the perils of violation of the statutory directives, the contravention of rules and regulations lured by the tendency to take shortcuts, being oblivious to the basic canons of corporate governance and the stringent regulatory norms and compliance requirements have increasingly acquired centre-stage.