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SoftBank Group Corp.-backed Paytm, whose official name is One 97 Communications Ltd., went public to much fanfare in 2021 after Sharma built the company to make it easier for consumers to make payments and transfer money.

India’s banking regulator stunned the finance and tech industries by abruptly suspending much of digital giant Paytm’s business late Wednesday.

But the surprise move came only after the watchdog had warned the fintech pioneer repeatedly in the past two years about questionable dealings between its popular payments app and its lesser-known banking arm.

A technical audit by the Reserve Bank of India found money and data traffic flows between the tightly regulated Paytm Payments Bank Ltd. and the rest of the Paytm universe that created accounting and supervisory problems, according to people familiar with the matter. The regulator had warned Paytm about such issues before, but they remained unresolved, the people said, asking not to be identified because the matter isn’t public.

The regulator also grew worried about management overlap between the bank and the rest of Paytm, the people said. They saw the same set of top officers and decision-makers acting on behalf of the bank and the broader fintech company, creating potential conflicts of interest.

The RBI on Wednesday ordered Paytm Payments Bank, which is 49% owned by Paytm’s parent company, to stop its popular mobile wallet business along with other activities, citing persistent non-compliance and supervisory concerns. The regulator said the bank arm, which processes transactions for the giant payments brand Paytm, must stop its banking activities after February 29.

Shares of Paytm plunged 20% in Mumbai trading, the most since the company’s stock-market debut in late 2021. The ruling could directly and indirectly slash more than half of its operational earnings, Jefferies analysts estimated.

“The bigger issue is Paytm has not been on the good books of the regulator and going forward, their lending partners also could possibly re-look at the relationships,” Macquarie analysts including Suresh Ganapathy said in a note.

Paytm can now appeal to the department within the RBI that passed the order and later to the central bank’s board, the people said. The company also can seek legal action through courts. Still, the RBI’s stance is that it doesn’t want Paytm to operate a payments bank anymore, the people said.

RBI and Paytm representatives didn’t respond to requests for comment. Earlier, Paytm said it was taking urgent steps to comply with the RBI’s order and was working with the banking regulator to assuage concerns as early as possible. Going forward, it won’t work with Paytm Payments Bank, and will expand its financial and payments services through its partnerships with other banks, the company said in a filing to stock exchanges.

Paytm had also come under fire for its backing from Ant Group Co., the fintech leader founded by Jack Ma, particularly as domestic sentiment soured rapidly on Chinese firms. Yet the link to a Chinese company wasn’t a major reason behind RBI’s latest action, as regulators haven’t found evidence of data from Paytm flowing to China in the most recent audit, the people said.

But the abrupt action suggests regulators have grown dissatisfied with Paytm and raises the prospect of more action down the road. The order is a major setback for charismatic founder Vijay Shekhar Sharma, just as he’s trying to convince investors Paytm can reverse years of losses to become sustainably profitable.

SoftBank Group Corp.-backed Paytm, whose official name is One 97 Communications Ltd., went public to much fanfare in 2021 after Sharma built the company to make it easier for consumers to make payments and transfer money. Still, its stock has slumped more than 70% since as investors questioned its profit-making ability and it tussled with regulators.

The RBI order “significantly hampers Paytm’s ability to retain customers in its ecosystem, and accordingly restricts it from selling payment products and loan products,” the Macquarie analysts said. “Revenue and profitability implications in the medium to long term could be significant.”

  • Published On Feb 2, 2024 at 09:02 AM IST

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