On November 18, 2021, Vijay Shekhar Sharma took to the stage at the Bombay Stock Exchange. wiping away tears as he addressed the crowd. His company One97 Communications just completed the biggest IPO in Indian history, raising $2.4 billion and catapulting Sharma and his company to Indian tech stardom.
One97 Communications was better known as the parent company of Paytm, the payment service used by both Uber and the Indian Railways. The company was backed by well-known investors such as Alibaba and Jack Ma’s Ant Group, Masayoshi Son’s Softbank and Warren Buffett’s Berkshire Hathaway.
The IPO is the latest good news for Paytm.
The company has not yet made a profit. One97 shares have fallen more than 70% since its debut. Softbank, Alibaba and Berkshire have sold most, if not all, of their shares due to either concerns about the Chinese presence or falling share prices. Paytm faces stiff competition in the payments space from Google and Walmart-owned Flipkart, and analysts are now viewing the company as a classic case of hype causing overrated debut. (Paytm also lost his title India’s largest IPO, behind Life Insurance Corporation’s $2.7 billion IPO in May 2022.)
Now the regulatory crackdown is jeopardizing Paytm’s entire business model, preventing it from providing profitable banking and mobile wallet services.
Rajrishi Singhal, former executive editor of an Indian newspaper Economic times and author Slip, Drip and Trip: The Untold Story of India’s Financial Sector Reforms, Paytm’s fall stems from the growth-at-any-cost model common among startups.
“Paytm has been pushing the envelope aggressively and this takes us back to its original formation as a startup, where your revenue matters more than what you deliver in terms of margin or profit,” he says. “Paytm has been a bit dismissive of the regulatory framework.”
“Compliance has been the cornerstone of our product development initiatives since inception,” Paytm said in a statement to Luck. “We cannot bring products to market without obtaining the necessary approvals, while ensuring that each new offering is both innovative and fully compliant with regulatory standards.”
However, the stringent regulatory crackdown – perhaps motivated by a desire to avoid any risk of financial crisis ahead of key national elections in April – is throwing the future of the once high-profile startup into question, potentially wiping out much of the firm’s pre-tax profits.
What happened to Paytm?
January 31 Reserve Bank of India Paytm Payments Bank accused— a subsidiary financial institution that stores all money in Paytm digital wallets — for “persistent non-compliance” and ordered the financial institution to stop accepting new deposits.
Then, on March 1, India’s Financial Intelligence Unit fined the bank $660,000 for diverting funds to illegal activities such as online gambling.
Paytm quickly cut ties with the payments bank; Sharma resigned as chairman of the bank’s board last week. Paytm is now trying to forge relationships with third-party banks like Axis Bank.
The company has confirmed that its payment services will continue beyond March 15, the deadline set by the RBI to shut down Paytm Payments Bank.
At a conference in Tokyo on Tuesday, Sharma suggested advisors were to blame for Paytm’s difficulties. “The biggest thing I’ve learned is that often your teammate and advisor may get it wrong… It’s important for you to take care of this and not just let your teammate or advisor tell you what to do. be,” he said, according to Bloomberg.
Without a payments bank, Paytm is limited to just conducting transactions, a business that “doesn’t provide any revenue path,” says Singhal.
In a stock report immediately after the RBI order, Paytm warned that the order to close Paytm Payments Bank may be delayed annual income before interest, taxes, depreciation and amortization of up to INR 5 billion, or US$60.4 million at current exchange rates. Paytm earned EBITDA of $55 million for the nine months ended December 31, 2023.
But Sharma may have no choice in the matter. “If it wants to retain the Paytm brand, it will have to survive only as a unified payment interface. [India’s nationwide system for instant payments]because it cannot remain a wallet or a bank,” predicts Singhal.
Paytm is the latest Indian startup to fail. Education technology company Byju’s was once India’s most valuable startup, valued at $22 billion at the end of 2022, but the startup now faces allegations of inflated numbers, a toxic work culture, unethical sales practices and non-payment of debts. (The firm denies all claims.) On February 23, Byju’s shareholders voted to oust CEO Byju Raveendran. He refuses to resign.
Wrong time
Regulators have targeted Paytm and its payments bank before. The payments bank has been unable to attract new customers since March 2022 and has been given a slap by the RBI. $650,000 fine in October last year for failing to comply with know-your-customer requirements. Then in November officials Banned by Paytm from signing new sellers.
The action against Paytm is part of wider repression on the Indian financial industry, especially on “shadow banks” or financial institutions outside the traditional financial system.
Indian voters will head to the polls for national elections starting in April. India’s ruling party, the Bharatiya Janata Party, and Prime Minister Narendra Modi rely on the country’s strong economy. Most analysts expect Modi win a third term.
And against the backdrop of overheating markets – Indian stock markets recently overtook The Chinese city of Hong Kong in terms of overall market capitalization – central bankers fear financial firms are heading for trouble.
“The financial crisis will inevitably turn into a political crisis,” says Singhal. “I think [Paytm was] a risk that the political system could not accept.”
The situation reminds Singhal of previous financial scandals in India, many of which he covered during his career as an Indian business journalist and are reflected in his book. For example, in the early 1990s, Harshad Mehta, a trader nicknamed “The Big Bull,” defrauded banks to finance speculative bets on the stock market. In the tumultuous environment of the time, traders like Mehta “didn’t know when to say no and walk away,” says Singhal.
Could today’s bull market in India be sowing the seeds of a new scandal?
“The financial sector is not known for its love of history,” says Singhal.