Paytm's Foreign Investment Under Scrutiny: Inter-Ministerial Committee Examines FDI From China; Report

An inter-ministerial committee is closely examining foreign direct investment (FDI) from China in Paytm Payments Services Ltd (PPSL), a subsidiary of Paytm parent One97 Communications Ltd, according to sources cited by PTI. The scrutiny comes in the wake of regulatory challenges faced by Paytm, including the rejection of its payment aggregator license application by the Reserve Bank of India (RBI) in November 2022.

Paytm Payments Services had initially applied for a license with the RBI in November 2020 to operate as a payment aggregator under the guidelines on Regulation of Payment Aggregators and Payment Gateways. However, the central bank rejected the application, directing PPSL to resubmit it to comply with Press Note 3 under FDI rules.

One97 Communications Ltd (OCL), the parent company of Paytm Payments Services Ltd, has investments from the Chinese firm Ant Group Co. Consequently, on December 14, 2022, OCL applied to the Indian Government for past downward investment from OCL into PPSL to comply with Press Note 3 prescribed under FDI guidelines.

Under Press Note 3, the government mandates prior approval for foreign investments from countries that share land borders with India, including China, to curb opportunistic takeovers of domestic firms following the COVID-19 pandemic. The inter-ministerial committee is expected to make a decision on the FDI issue after due consideration and a comprehensive examination of the investments from China in PPSL.

A Paytm spokesperson clarified that PPSL applied for an online Payment Aggregator (PA) application for online merchants, and the regulator subsequently asked PPSL to seek necessary approvals for past downward investment and resubmit the application. The spokesperson emphasized that this is a regular process where every entity applying for a payment aggregator license has to obtain FDI approval.

The spokesperson further explained, "Since then the ownership structure has changed. The Paytm founder remains the largest stakeholder in the company. Ant Financial reduced its stake in OCL to less than 10 per cent in July 2023. Subsequently, it does not qualify for beneficial company ownership. OCL founding promoter now holds a 24.3 per cent stake. Therefore, your understanding of FDI from China in PPSL is incorrect and misleading."

Despite the ongoing scrutiny, PPSL was allowed to continue its online payment aggregation business for existing partners during the pending process, with a restriction on onboarding new merchants. The changing ownership structure, with the Paytm founder retaining the majority stake and Ant Financial reducing its stake.

In a related development, the Reserve Bank took stringent action against Paytm Payments Bank Ltd (PPBL), an associate company of OCL, by barring it from accepting deposits or top-ups in any customer account, prepaid instruments, wallets, and FASTags after February 29, 2024. This action followed a comprehensive system audit report by external auditors, revealing persistent non-compliance and continued material supervisory concerns in PPBL.

This regulatory action is not the first faced by PPBL, as earlier in March 2022, the apex bank had prohibited PPBL from onboarding new customers with immediate effect. The current developments raise questions about compliance within the Paytm ecosystem and highlight the challenges faced by one of India's leading digital payment platforms.

A query sent to OCL for comments on the recent developments remained unanswered at the time of reporting. The situation remains fluid, and stakeholders are awaiting the decision of the inter-ministerial committee on the FDI issue.

The shares of Paytm were seen trading with gains of nearly 2% at Rs 427.25 per share as of 11 am on the National Stock Exchange (NSE). The stock has plunged more than 35% in the last one year.