In a significant turn of events for India’s financial market, Paytm’s bid to fortify its payments subsidiary with a substantial investment has met with regulatory roadblocks. A 500 million rupee ($6 million) capital injection intended for Paytm Payment Services is currently in limbo due to the Indian government’s reservations about the Chinese shareholding in the parent company, as per reports from government officials and a confidential document revealed by Reuters.
One 97 Communications, widely recognized by its brand name Paytm, has found itself under rigorous examination by the nation’s banking overseer and the agency responsible for combating financial crimes, following a directive by the central bank in January demanding the termination of its payments bank operations. This heightened scrutiny is cited as one contributing factor to the decision deferring the investment clearance.
In an effort to consolidate its position as a premier portal for online transactions, last year Paytm requested governmental consent for an investment it had already realized into its nascent payments gateway arm. The funds are essential for the arm, Paytm Payments Services, to procure the payment aggregator license, without which it cannot process online payment operations.
Strict regulatory protocols dictate that a special committee, composed of members from the home affairs, finance, and industries ministries of India, give their authorization to such investments, factoring in insights from the foreign ministry. This process is particularly pertinent as Antfin (Netherlands) Holdings, an affiliate of China-based Ant Group, holds a 9.88% stake in Paytm.
Despite obtaining clearance from the Ministry of Home Affairs in January, the foreign ministry vetoed the proposal on what was described as “political grounds,” culminating in an indefinite deferral. Sources highlighted that the entity’s Chinese ownership poses a discomfort for Indian authorities, who have to greenlight any investments stemming from China or flowing into organizations with Chinese stakeholders.
Should investments get executed without preemptive approval, parties involved can face financial penalties, though the magnitude of these sanctions remains undisclosed in the document.
In response to inquiries by Reuters, Paytm countered the circulating notions, stating, “We have received no communication that the investment proposal has been deferred or that a penalty is proposed to be imposed.” Paytm further asserts that any assumptions regarding a deferment due to ambiguities about Chinese stakes and impending fines are unfounded and deceptive.
Solicitations for comments from India’s foreign, home, finance, and industries ministries remained unanswered.
As of yet, there’s no clear timeline provided for reconciling the issue, leaving industry observers guessing about what steps Paytm would need to take to get the pending approval. Paytm Payment Services is not a negligible appendage—it accounted for a significant 25% of Paytm’s consolidated operational revenue in 2022/23, as per the latest annual report. The company had been facilitating online payment services routinely but needed to transfer this activity to a legally discrete entity, Paytm Payments Services, per regulatory demands.
Should the authorities decide to maintain their hold on the investment, Paytm could be mandated to retract the invested funds from its payment services arm, which could have deeper ramifications for its business model. While the direct impact of the approval deferment on Paytm Payment Services’ ability to continue offering online payment services was not immediately clear, the decision injects considerable uncertainty into the company’s strategic operations moving forward.
As of the date of the report, it’s unclear whether Paytm Payment Services can continue its operations without the necessary investment approval or what its next course of action might be in the face of this regulatory conundrum. The developments mark a growing trend of heightened vigilance on foreign investments in critical sectors, especially against a backdrop of geopolitical tensions.
