The sudden action on Paytm raised many an eyebrow, even though the company has been in the eye, almost ever since it listed. Its promoter, Vijay Shankar Sharma, has been a poster boy of the fintech revolution, an enterprising and most expressive representative of the startup ecosystem.
The RBI allows payments banks, under its differentiated licensing scheme, to accept current and savings deposits and offer payments products without any lending. But in a sledge hammer move triggered by wanton and persistent noncompliance on various operational and other risks, the RBI invoked sweeping powers vested in the RBI in terms of Section 35 of the Banking Regulation Act 1949 to bar the Paytm Payments Bank Limited (PPBL) from:
(i) No further deposits, credit transactions, or top-ups shall be allowed in any customer accounts, prepaid instruments, wallets, FASTags, National Common Mobility Cards (NCMC) etc. after February 29, 2024.
(ii) withdrawal or utilization of balances by its customers from their accounts including savings bank accounts, current accounts, prepaid instruments, FASTags, NCMC, etc. are to be permitted without any restrictions, up to their available balance.
(iii) No other banking services, other than those referred to in (ii) above, like fund transfers (irrespective of name and nature of services like AEPS, IMPS, etc.), BBPOU, and UPI facility should be provided by the bank after February 29, 2024.
(iv) The Nodal Accounts of OCL and PPBL are to be terminated at the earliest, in any case not later than February 29, 2024.
(v) Settlement of all pipeline transactions and nodal accounts (in respect of all transactions initiated on or before February 29, 2024) shall be completed by March 15, 2024, and no further transactions shall be permitted thereafter.
Slew of charges against Paytm
The catalogue of charges against a recalcitrant Paytm covers a wide ground. Such charges include KYC violations, alleged fudging of the customer base, linking the same Pan for onboarding multiple customers, conducting transactions beyond the limits, creating doubts about likely money laundering, etc. While the jury may still be out on the vexed issue of FEMA violations, there seems to be incontrovertible evidence of flouting of the KYC norms.
Regulatory Action
The RBI had earlier imposed a fine of Rs. 5.39 crore over non-compliance of its licensing guidelines, enhancing maximum balance at the end of the day, cyber security framework, and securing mobile banking applications, including UPI ecosystem. Accordingly, the RBI barred the PPBL on January 31, 2024 from taking any deposits or credit transactions or top-ups in any of its customer accounts. The RBI also stopped PPBL from providing any other banking services, such as UPI facility and fund transfers, after February 29, 2024, thereby causing an existential crisis. Larger issues of the macro-economy, consumer protection, the lackadaisical role of the board of directors, Board dynamics and due diligence and accountability in respect of auditing firms with punitive measures in cases of financial mismanagement, fraud, and corporate failures have also increasingly come to the fore in the wake of the Paytm imbroglio.
Some news even suggested that the RBI had asked Directorate of Enforcement (ED) to check for suspected breaches at PPBL. No wonder, then, the shares of Paytm had a free fall steeply dipping 30% post the regulatory whiplash.
Extensive Concerns and Consternation
One97 Communications (OCL), the parent company of Paytm, owns 49% equity in PPBL, with Vijay Shekhar Sharma accounting for the balance 51%. There are also inextricable business linkages between OCL and PPBL. The parent company’s Paytm app offers various payments instruments from Paytm Payments Bank, such as Wallet, Paytm UPI, FASTag, and fixed deposits. The stern regulatory action, which effectively banned PPB from operations, not only brusquely jolted Paytm but also caused extensive concerns and consternation in the broader ecosystem of the fintech industry in India. These concerns have been manifested in the closure of startups, viz., Coinome, Throughbit, Koinex, and Muvin and discernible business deceleration in case of Slice, Jupiter, PayU, and Instamojo. Such concerns stemmed from those of throttling innovation, high compliance cost, the negative impact on inflow of foreign and domestic investments, hit on digital transactions, closure of several fintech start-ups, and the destruction of the hard-earned money of end-consumers. These and other issues necessitate a balanced regulatory approach to prevent value or investment erosion and the hit on ease of doing business.
Compliance in letter and spirit – The Holy Grail
There seems to be widespread agreement that repeated non-compliance with statutory requirements and regulatory prescriptions, flouting of the RBI directives and repeated contravention of the rules brooks no soft-pedalling. These aspects have clearly to be non-negotiable.
Historically, the RBI’s accent has been on licensing and greater supervisory rigor and subjecting fintech products to the customary regulatory instruments and mechanisms. Given the cognisable dilemmas, there could be a case for a more nuanced approach of the RBI to foster innovation within the regulatory sandbox in coordination with new-age regulators to salubriously influence the contours of fintech in India. While innovation is certainly necessary, particularly in the fintech ecosystem, innovation must proceed in accordance with the established rules of the game for a comprehensive assessment and perspective.
The issue of greater compliance cost has evoked protracted discussions but it has to be realized that any short-cut, any laxity or pursuit of “creative” banking or other policies could lead to a regulatory quagmire and even conceivably mean all the difference between existence and collapse as starkly reflected in the cases of Zee, Byju’s, Paytm, Religare, etc.
In a limited holding-up operation, Paytm was constrained to partly salvage the situation by opening an escrow account with Axis Bank to ensure merchant settlements to Axis Bank to “…ensure seamless merchant settlements as before”. This move, which was initiated in conformity with the RBI stipulation, meant that Paytm QR codes, soundboxes and card machines will continue to be operational after the revised March 15 deadline (earlier February 29) provided the merchants migrated to other banks. This measure assumed significance since 330 million Paytm wallets were ostensibly used for daily transaction.
Pathway to the Future
While the going was good, the major players had a ball. But it was too good to last and the business model was clearly unsustainable in the medium term. And, therefore, fail it did – but what caused extensive concern and consternation that it was not a minor fall but a free fall with devastating consequences not just on the individual entity but also on the larger ecosystem.
The perils of violation of the statutory directives, the contravention of rules and regulations lured by the tendency to take shortcuts, being oblivious to the basic canons of corporate governance, the regulatory norms and compliance requirements have increasingly acquired centre-stage. In this sordid setting, the writing on the wall is clear, the message of history unmistakable: while there may not be any systemic issue, persistent non-compliance could have devastating consequences across the development spectrum. Hence, adroit and effective risk management must acquire primacy in the operational risk strategy to prevent any recurrence of such calamitous events. There can no longer be business as usual, a sense of déjà vu – a situation of “plus ça change, plus c’est la même chose” aptly described by the French writer Jean-Baptiste Alphonse Karr in 1849, i.e., the more it changes, the more it remains the same.
Despite disruptive effects and a shake-up in the system, there may not be any marked deceleration in investments in the early stage fintech because of their greater agility and adaptability.
In view of the myriad dimensions of this multi-layered issue, the Company Law Committee (CLC), which was set up by the Ministry of Corporate Affairs in September 2019, is also likely to examine various aspects of the regulatory regime for start-ups and suggest suitable policy prescriptions to make the financial system more sound, robust and resilient.
ABOUT THE AUTHORS
Vipin Malik, Chairman, Infomerics Ratings, served on Boards of Reserve Bank of India and Bharatiya Reserve Bank Note Mudran Private Limited, Canara Bank, J&K Bank, etc. Author of several well-received books and several articles. He appears often on television debates on economy issues.
Dr. Manoranjan Sharma is Chief Economist, Infomerics, India. With a brilliant academic record, he has over 250 publications and six books. His views have been cited in the Associated Press, New York; Dow Jones, New York; International Herald Tribune, New York; Wall Street Journal, New York.
