Explained: Why the Paytm stock has been plummeting – Times of India

NEW DELHI: The One 97 Communications paytm stock, now valued at less than one third of its initial offer price, sank to an all-time low on Monday, eventually settling 13% lower at Rs 674.80 on the National Stock Exchange. In Tuesday’s opening trade, it shed another 3% and is currently trading at Rs 653.75.
The company had launched a Rs 18,300-crore IPO in November but the stock has been on a free fall since and is down about 70% from the issue price of Rs 2,150 and its IPO valuation of Rs 1.4 lakh crore is now down to a market cap of Rs 44,000 crore. We decode why it has been a bruising few days for the stock.
The RBI order
On Friday, the Reserve Bank of India ordered Paytm Payments Bank to stop taking on new customers, citing “material supervisory concerns” and directed the bank to appoint a company to audit its IT system over “material supervisory concerns”.
In reply, Paytm Payments Bank said it is taking all the steps to comply with the RBI orders. “Dear customers, we value your relationship with us. We are taking all steps to comply with the RBI directions. Our existing customers can continue to seamlessly use all our banking services.”
This is the third time that Paytm Payments Bank is facing action from the banking regulator since inception in May 2017
This is not the first time the central bank has pulled up Paytm.
In July 2021, Paytm Payments Bank had received a show-cause notice from RBI for submitting false information with respect to transfer of its Bharat Bill Payment business to the payments bank. RBI had then imposed a monetary penalty of Rs 1 crore on the company.
In 2018, the the regulator had made certain observations about the processes the company followed to acquire new users, especially in relation to KYC norms.The RBI had then said that Paytm was in violation of the KYC rules, leading to the ban. Furthermore, RBI’s reply to the RTI (Right to Information) question also mentioned that Paytm failed to maintain the end-of-the-day balance limit of Rs 100,000 per account.
Paytm Payments Bank is also not the first to be penalised for systemic glitches
In fact it is just the latest to join a growing list of financial companies and lenders, such as MasterCard, Diners Club, American Express and HDFC Bank, that have been penalised for the same.
In July 2021, RBI placed curbs on Mastercard for non-compliance with local data storage norms. The ban is still in place and yet to be lifed.
In April 2021, RBI banned US-based card company Diners Club from onboarding new domestic customers onto its card network for violating data storage norms. That ban was lifted in November 2021. American Express, which was also banned along with Diners Club, is still facing restrictions.
In December 2020, the RBI had barred HDFC Bank from issuing new cards and introducing new digital products after multiple systemic glitches were reported. The ban was lifted only in August 2021.
Founder arrested for allegedly ramming SUV into police car
In an entirely unrelated episode, on Sunday it was revealed that Paytm founder Vijay Shekhar Sharma had been arrested in February for allegedly ramming his SUV into a police vehicle which belonged to South Delhi deputy commissioner of police Benita Mary Jaiker. A constable posted with Jaiker filed the complaint .After the incident, the police had traced down the vehicle, linking it to Sharm. Paytm later issued a statement claiming the news reports were “exaggerated, as even the complaint against the vehicle was for a minor offence under a bailable provision of law and requisite legal formalities were completed on the same day.”
The China link
And on Monday, Bloomberg reported that the RBI acted against Paytm Payments Bank as it had allegedly allowed data to flow to servers in China in violation of India’s rules, and didn’t properly verify its customers. The company has since refuted the allegations.
Paytm Payments Bank is a joint venture between Paytm and its founder Vijay Shekhar Sharma. China’s Alibaba Group Holding. and its affiliate, Jack Ma’s Ant Group, own shares of Paytm. The Bloomberg report, which quoted a source, said annual inspections by the Reserve Bank of India found the company’s servers were sharing information with China-based entities that indirectly own a stake in Paytm Payments Bank.
” There is a serious allegation of data leaks to Chinese firms whereas RBI also barred Paytm bank from adding new customers. Unrealistic valuations at the time of IPO was a key concern initially then we didn’t see any positive trigger that could have helped the stock to recover. We don’t have clarity of business model and timing of profitability while there are regulatory headwinds, therefore new investors should avoid this stock despite a sharp fall in the price while existing investors may also look for exit opportunities,” said Santosh MeenaHead of Research, Swastika Investmart Ltd
Paytm denies China data leak report
However, Paytm Payments data denied reports that leak to Chinese firms as false and sensationalist. “Paytm Payments Bank is proud to be a completely homegrown bank, fully compliant with RBI’s directions on data localisation. All of the Bank’s data resides within India,” it said.
Even founder Vijay Shekhar Sharma, put out a statement, denying these allegations.
“I want to inform and confirm that in various observations RBI has shared with Paytm Payments Bank, there is absolutely no reference to any data sharing or servers being outside or data sharing with any unauthorised personnel national or international – any country whatsoever,” Sharma said.
The Paytm Bank started operations in 2017 and claims to have 60 million bank accounts with 4 lakh users added every month.
Connecting the dots
On Tuesday, Business Standard, citing multiple sources, reported that Paytm Payments Bank was prohibited from acquiring new customers primarily owing to violations of norms on “know your customer —anti-money laundering (KYC-AML)”. The banking regulator was reportedly discussing concerns related to KYC-AML norms with the payments bank for over six months and action was taken after the lender failed to comply with them.
What’s next?
Over the next few days, Paytm Payments Bank will submit to the regulator for its approval several names as potential audit candidates, and the regulator may finalise the terms of reference based on its findings that include a series of lapses in meeting the Know Your Customer (KYC) norms, reported Economic Times.
“The payments bank did not plug the gaps in the system even after repeated relevant references by the regulator. There were consistent deficiencies found in the bank’s KYC process, like accounts that needed a full KYC were not done,’’ reported ET, citing a source. “Data from the payments bank was also flowing to the wallet operator, which was not quite a watertight compartment and against central bank rules. All in all, compliance was either pending, or unsatisfactory.”
What does this mean for the company’s small finance bank licence?
RBI’s regulatory order is a major blow to Paytm’s plans of converting itself into a small-finance bank as it was looking to apply for the licence in August this year. One of the plus points for a small finance bank ( SFB) is that they can lend, unlike payment banks who have a tough business model
Macquarie in its report on One97 Communications has said that the ban may not have a substantial impact on the listed fintech’s business but it will have a significant impact on its brand and could be a speedbump in its plans to convert its Payments Bank licence into a Small Finance Bank licence.
RBI guidelines allow payments bank to convert into an SFB after the completion of the first 5 years. Paytm is completing the 5-year period in June this year. But the latest RBI order means it might just have to wait a little bit longer.