On November 18, 2021, Vijay Shekhar Sharma took the stage at the Bombay Stock Exchange and wiped away tears while addressing the crowd. His company, One97 Communications, had just completed the largest initial public offering in Indian history, raising $2.4 billion and elevating Sharma and his company to Indian tech stardom.
One97 Communications was best known as the parent company of Paytm, a payments service adopted by both Uber and the Indian Railway Service. High-profile investors such as Alibaba and Jack Ma’s Ant Group, Masayoshi Son’s Softbank and Warren Buffett’s Berkshire Hathaway backed the company.
The IPO was the last good news that Paytm would have.
The company has not yet made a profit. One97 shares are down more than 70% since their debut. Softbank, Alibaba and Berkshire have sold most, if not all, of their holdings, either over concerns about the Chinese presence or falling share values. Paytm faces fierce competition in the payments space from Google and Walmart-owned Flipkart, and analysts now see the company as a classic case of hype leading to an overvalued debut. (Paytm also lost its largest IPO title in India, surpassed by Life Insurance Corporation’s $2.7 billion IPO in May 2022.)
Now, a regulatory crackdown threatens Paytm’s entire business model, preventing it from operating its lucrative mobile wallet and banking services.
For Rajrishi Singhal, former executive editor of the Indian newspaper The economic times and author of Slip, Sew and Stumble: The Untold Story of India’s Financial Sector Reforms, Paytm’s downfall is due to a growth-at-all-costs model common to startups.
“Paytm had been aggressively pushing the envelope, and that goes back to its initial formation as a startup where its revenue matters more than what it is delivering in terms of margins or profits,” he says. “Paytm was a bit dismissive of the regulatory framework.”
“Compliance has been the cornerstone of our product development initiatives from the beginning,” Paytm said in a statement to Fortune. “We cannot bring products to market without obtaining the necessary approvals while ensuring that each new offering is innovative and fully complies with regulatory standards.”
However, the regulatory crackdown, perhaps motivated by a desire to avoid any risk of a financial crisis ahead of April’s critical national elections, puts the once-successful startup’s future in doubt, potentially eradicating most of the profits. before company taxes.
What happened to Paytm?
On January 31, the Reserve Bank of India accused Paytm Payments Bank, an affiliated financial institution that holds all money in Paytm digital wallets, of “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 into illegal activities such as online gambling.
Paytm acted quickly to sever ties with the payments bank; Sharma resigned as chairman of the bank’s board last week. Paytm is now trying to establish relationships with third-party banks such as Axis Bank.
The company has stated that its payment services will continue after March 15, the RBI’s deadline for Paytm Payments Bank to cease operations.
At a conference in Tokyo on Tuesday, Sharma suggested that advisors could have been to blame for Paytm’s problems. “The most important thing I’ve learned is that a lot of times your teammate and advisor may not understand you correctly… It’s important to take care of it yourself instead of just letting a teammate or advisor suggest what to do.” should do. be,” he said, according to Bloomberg.
Without a payments bank, Paytm is limited to facilitating transactions, a business that “offers no avenues for revenue,” says Singhal.
In a stock filing immediately after the RBI order, Paytm warned that the order to close Paytm Payments Bank could reduce annual earnings before interest, taxes, depreciation and amortization by up to 5 billion Indian rupees, or 60.4 million dollars at the current exchange rate. Paytm generated $55 million in EBITDA in the nine months ended December 31, 2023.
But Sharma may have little choice in the matter. “If it wants to keep the Paytm brand alive, it will have to survive only as a Unified Payments Interface (India’s national instant payments system), because it cannot remain a wallet or a bank,” predicts Singhal.
Paytm is the latest member of India’s startup royalty to disappear. Edtech company Byju’s was once India’s most valuable startup, worth $22 billion at the end of 2022, but now faces accusations of inflated numbers, a toxic work culture, unethical sales practices and late debt payments. (The company denies all claims.) On February 23, Byju’s shareholders voted to remove CEO Byju Raveendran. He refuses to resign.
Bad moment
Regulators had earlier targeted Paytm and its payments bank. The payments bank has been unable to attract new customers since March 2022, and the RBI imposed a fine of $650,000 last October for failing to follow know-your-customer requirements. Then in November, officials banned Paytm from hiring new merchants.
The actions against Paytm are part of a broader crackdown on India’s financial industry, particularly against “shadow banks,” or financial institutions that sit outside the traditional financial system.
Indian voters will go to the polls for national elections beginning in April. India’s ruling party, the Bharatiya Janata Party, and Prime Minister Narendra Modi are running on the back of the country’s strong economy. Most analysts expect Modi to win a third term.
And with markets booming (India’s stock markets recently surpassed those of the Chinese city of Hong Kong in terms of total market capitalization), central bankers fear that financial firms are setting themselves up for trouble.
“A financial crisis would invariably turn into a political crisis,” says Singhal. “I think (Paytm was) a risk that the political system could not take.”
The situation reminds Singhal of previous Indian financial scandals, many of which he covered during his career as an Indian business journalist and are described 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 heady atmosphere of the time, traders like Mehta “didn’t know when to say no and walk away,” says Singhal.
Could the current bull market in India be sowing the seeds of another scandal?
“The financial sector is not known for its love of history,” says Singhal.
