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, had just completed India’s largest-ever IPO, raising $2.4 billion and making Sharma and his company Indian tech celebrities.
One97 Communications was best known as the parent company of Paytm, a payment service adopted by both Uber and the Indian Railway Service. High-profile investors such as Jack Ma’s Alibaba and Ant Group, Masayoshi Son’s Softbank and Warren Buffett’s Berkshire Hathaway have backed the company.
The IPO was the last good news Paytm would get.
The company has yet to turn a profit. One97 shares have fallen more than 70% since its debut. Softbank, Alibaba and Berkshire have sold most, if not all, of their stakes, due to concerns about China’s presence or plummeting stock prices. Paytm faces stiff competition in the payments space from Google and Walmart-owned Flipkart, and analysts now see the company as a classic case of hype causing an overvalued debut. (Paytm also lost the title of India’s largest IPO, 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 banking and wallet services.
For Rajrishi Singhal, former executive director of the Indian newspaper Economic times and author of Slips, stitches and stumbles: The untold story of Indian financial sector reforms Paytm’s fall stems from a growth-at-all-costs model common to startups.
“Paytm has been pushing the envelope aggressively, and that goes back to its early formation as a startup where your bottom line matters more than what you’re delivering in terms of margins or profits,” he says. “Paytm has been a little cavalier about the regulatory framework.”
“Compliance has been the cornerstone of our product development initiatives since inception,” Paytm said in a statement Fortune. “We cannot bring products to market without obtaining the necessary approvals, while ensuring that each new offering is innovative and fully compliant with regulatory standards.”
Yet the regulatory crackdown – perhaps motivated by a desire to avoid any risk of a financial crisis before April’s crucial national elections – calls into question the future of what was once a high-flying startup, 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 the money in Paytm’s 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 directing funds to illegal activities such as online gambling.
Paytm moved quickly to cut ties with the payments bank; Sharma resigned as chairman of the bank’s board of directors last week. Paytm is now looking to build relationships with third-party banks, such as Axis Bank.
The company said its payment services will continue beyond March 15, the cut-off date set by the RBI for ceasing operations of Paytm Payments Bank.
At a conference in Tokyo on Tuesday, Sharma suggested that consultants could be to blame for Paytm’s woes. “The biggest thing I’ve learned is that a lot of times your teammate or consultant might not understand well… It’s important that you take care of it instead of letting a teammate or consultant suggest what they should be,” he said, according to Bloomberg.
Without a payments bank, Paytm simply facilitates transactions, an activity that provides “no revenue path,” Singhal says.
In a stock filing soon after the RBI order, Paytm warned that the order to shut down Paytm Payments Bank could drag down annual earnings before interest, taxes, depreciation and amortization by up to 5 billion Indian rupees, or 60, $4 million at current exchange rates. Paytm generated EBITDA of $55 million 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 nationwide system for instant payments]because it cannot remain either as a wallet or as a bank,” predicts Singhal.
Paytm is the latest member of India’s startup royal family to shut down. Edtech company Byju’s was once India’s most valuable startup, worth $22 billion at the end of 2022, but now the startup faces accusations of inflated numbers, toxic work culture, unethical sales practices and failure to pay debts. (The company denies all claims.) On February 23, Byju’s shareholders voted to oust the CEO, Byju Raveendran. He refuses to resign.
Bad timing
Regulators had previously targeted Paytm and its payments bank. The payments bank has been unable to acquire new customers since March 2022, and the RBI issued a $650,000 fine last October for failing to follow know-your-customer requirements. Then, in November, officials barred Paytm from signing up new merchants.
The actions against Paytm are part of a broader crackdown on India’s financial sector, particularly on “shadow banks”, or financial institutions that sit outside the traditional financial system.
Indian voters will go to the polls in national elections starting in April. India’s ruling Bharatiya Janata Party and Prime Minister Narendra Modi are capitalizing on the country’s strong economy. Most analysts expect Modi to win a third term.
And with markets rising – Indian stock markets recently surpassed those of the Chinese city of Hong Kong in terms of total market capitalization – central bankers worry that financial firms are getting themselves into trouble.
“A financial crisis would inevitably 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 has 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 environment of the time, traders like Mehta “didn’t know when to say no and retreat,” says Singhal.
Could today’s bull market in India sow the seeds of another scandal?
“The financial sector is not known for its love of history,” says Singhal.