The Paytm Saga Explained

Pay Through Mobile, aka Paytm is to digital payments what Xerox is to photocopiers or what Colgate is to brushing teeth. A stock with an IPO price of over Rs. 2000, listed at 1600, went all the way down to 460, recovered some lost ground from there and then was recently dealt with a body blow by the RBI sending the stock price crashing 40% in just two trading sessions. On 31st of January this year, the RBI instructed Paytm Payments Bank Ltd, a 49% subsidiary of the listed entity One 97 Communications Ltd, to cease further deposits, credit transactions, and top-ups on customer accounts after February 29, 2024. This move raised grave concerns about the viability of Paytm’s very business model itself. So why did the RBI do this? Is it justified in using such a high handed approach as a regulator? What will be the business impact on Paytm going forward? Can Paytm bounce back from here? More importantly, should one invest in Paytm in this downturn? Let’s answer these questions one at a time.

1. Why did RBI do this? Because they found various irregularities in KYC  norms that were being followed by Paytm. There were also other compliance issues like related party transactions, concerns about money laundering and questionable transactions involving crores of rupees done via Paytm Payments Bank accounts. Instances of a single PAN being used to open thousands of Paytm Payments Bank accounts had also been reported. The RBI had to therefore step in and take this drastic step till Paytm gets its act together and falls in line on following KYC norms.

2. Is it justified in using such a high handed approach as a regulator? You decide. Should an innovator be allowed to flout critical KYC and money laundering regulations for the sake of faster growth of the digital payments ecosystem in the country? I personally don’t think so. The RBI is fully justified here. It has also given sufficient time to account holders to move their Paytm Payments Bank balances to other banks / payments banks. After all, all it takes is a click.

3. What will be the business impact to Paytm? This is an 8.3 crore rupees (million dollar) question. Following the RBI’s crackdown on Paytm Payments Bank, we received a statement from the Paytm group CFO saying “There may be an impression that Paytm and Paytm Payment Bank is one, but by design and by structure, it is not and it cannot be,” If this were true, there would be little impact on Paytm’s payments business even if all of Paytm Payments Bank’s accounts were frozen. That however, is far from true. When we make a UPI payment to a vendor by scanning his Paytm QR code, the money goes from your bank account and sits into what is called a “Nodal Account”. These nodal account services are offered by various banks like HDFC Bank (@okhdfcbank), ICICI Bank (@okicici), Yes Bank (@ybl) and………….. Paytm Payments Bank (@paytm)! Needless to say, all of Paytm’s digital payments transactions, including Fastags are as of now being routed through Paytm Payments Bank’s nodal accounts. After February 29th, these nodal accounts will get frozen. Even if Paytm wishes for just its payments business to continue as before, it needs these nodal accounts to function. So before 29th February, Paytm has to ditch its nodal accounts and tie up with various other banks offering nodal account services, change the UPI IDs and possibly even the QR codes of all the vendors accepting UPI payments via Paytm. All of this in the next 20 days! Not to mention, the loss of float and the interest margin thereon that the payments bank used to enjoy. What would be the business impact to Paytm through RBI's move? Massive!

4. Can Paytm bounce back and should one invest now? If there’s one reason why investors at various stages of its growth, have invested in Paytm, it is the attitude of its founder Vijay Shekhar Sharma. Here is a man who has come from very humble beginnings and through his Never Say Die attitude, created what is even today, a respectable 30,000 crore company. In his Paytm journey so far, he has conquered various setbacks and obstacles, many of which were regulatory in nature. This may be his toughest challenge yet but it is not his first. What is especially remarkable is that the man is not living in denial or playing the victim card. He has come out, acknowledged the lapses and promised to rectify them and get systems in place once again. It is a daunting task, especially given the fast approaching deadline but if anyone can, Vijay Shekhar Sharma can. Vijay hai toh mumkin hai! 5. Should one invest in Paytm in this downturn? Though this is a question better answered by one's financial professional, investing in Paytm at any price level has always been more of a bet on its founder than an analysis of its business fundamentals. That hasn't changed even now. If you feel the man can turn things around, place a bet. If in doubt, stay out!

Hope this helps,

Happy Investing!