Paytm’s China link that made authorities sit up

Paytm’s troubles with the authorities started much before India’s central bank announced strictures on its subsidiary, Paytm Payments Bank, on 31 January.

Early last year, concerned over Chinese investments in One97 Communications Ltd, the listed entity of the Paytm group, the Centre had rejected a proposal by the company for a post-facto approval of investments made in another subsidiary, Paytm Payments Services Ltd (PPSL). PPSL offers digital payments solutions and financial tools for businesses.

The external affairs ministry had recommended against the approval from a “political angle”, mentioned in an internal government note that Mint has seen. The “post-facto” FDI proposal was for One97 Communications to invest in its subsidiary Paytm Payments Services, showed the note.

After the external affairs ministry, the Department of Promotion of Industry and Internal Trade (DPIIT) and Department of Financial Services also did not approve the investments in March and May 2023, respectively.

“As per Paytm Payment Services Ltd, its creation and the capital infusion therein were both undertaken to comply with newly introduced regulations of RBI,” as per the note cited above.

The note further said that PPSL had applied to RBI (Reserve Bank of India) for a payment aggregator licence but was directed to “seek government approval for downstream investment”. In November 2022, RBI had sent a letter to PPSL asking it to resubmit the licence application within 120 days after seeking approval for “past downward investment from the company (One97) in to PPSL, to comply with FDI Guidelines”, and not onboard new online merchants.

On Thursday, RBI said the regulatory restrictions on Paytm Payments Bank were a result of persistent non-compliance and such measures are taken only after prolonged engagement with the entities involved.

A government official aware of the matter said that Paytm management, including CEO Vijay Shekhar Sharma, have also been informed about the concerns with regards to Chinese investments in more than one meeting.

Emails sent to the external affairs ministry and RBI remained unanswered till the time of going to print.

In an email response to Mint’s queries, a Paytm spokesperson said: “Paytm founder Vijay Shekhar Sharma remains the largest shareholder in the company. He acquired the ownership and voting rights from Antfin (Netherlands) Holdings BV and now holds a 24.3% stake, making him the single largest shareholder in the company. Hence, the investment from Antfin is now reduced to less than 10% and doesn’t account them as a beneficial owner.”

Therefore, questions on addressing concerns of Chinese investments and replacing Chinese investors in the company doesn’t arise, the spokesperson added.

Currently, One97 has investments from 34 investors classified as foreign direct investment (FDI), including Antfin (Netherlands) Holding B.V., hold a little over 45% in One97 Communications, and foreign portfolio investors (FPIs) hold 18.64%. The rest of the shares are with Sharma, retail investors, mutual funds and others.

The issue started in 2020 after RBI issued guidelines on regulation of payment aggregators and payment gateways. This required One97 Communications Ltd to hive off its payment aggregator business into a separate entity and ensure minimum net worth. Payment aggregators are intermediaries that facilitate digital payments between consumers and merchants or businesses.

In October 2020, One97 Communications incorporated PPSL, a wholly owned subsidiary with a paid-up capital of about 50 crore. It is this investment in the company that is under scrutiny, said the official cited above.

As per FDI rules, investments of up to 49% are allowed under the automatic route in the private banking sector, extendable up to 74% with the approval of the government.

However, India strengthened its foreign investment policy to regulate investment from neighbours during the covid-19 pandemic when valuations of companies were at a record low and the country saw tensions rise with China after clashes in Ladakh’s Galwan.

Meanwhile, the Indian central bank on 31 January directed Paytm Payments Bank Ltd to stop new credit and deposit operations, top-ups, fund transfers, and other such banking operations after 29 February this year.

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