Vijay Shekhar Sharma, To Buy 10.3% Stake In PayTM Worth Rs. 5195 crores from Antfin; Is PayTM Planning To Launch A FPO After Failed IPO?

Vijay Shekhar Sharma, PayTM, Antfin

According to a regulatory filing, Paytm announced that Ant Financial Services had diminished its shareholding by 10.3%; it involved transferring shares previously held by Antfin (Netherlands) Holding BV to Resilient Asset Management, another Netherlands-based entity exclusively owned by Shekhar Sharma. 

With the shares valued at $628 million based on the August 4 closing price, Ant Financial’s stake in Paytm will decrease to approximately 13% from its previous 24%.

In exchange for the share transfer, Resilient Asset Management, under Sharma’s ownership, issued Optionally Convertible Debentures (OCDs) to Ant Financial. These debentures are securities that can be traded and converted into equity, showcasing the complexity and innovation in this arrangement.

The Great Strategic Move

Underpinning this move is not only the transfer of shares but also the shifting power dynamics and by taking this bold step, Sharma now possesses greater control over the reins of the Noida-based fintech powerhouse.

Because both entities involved are registered in the Netherlands, legal experts suggest that the transaction will unlikely incur any tax implications in India.

Thus, the implication of this deal is profound; by securing a larger portion of the company, Sharma gains greater influence over Paytm’s strategic direction. Additionally, this move is viewed as a step toward streamlining the ownership structure of One97 Communications, Paytm’s parent company.

In previous months, Ant Financial’s involvement with Paytm has gradually waned. In February, China’s Alibaba, Ant Financial’s parent entity, divested its remaining 3% stake in Paytm through an open market transaction. This move follows Alibaba’s previous 7.3% stake in One97 Communications before Paytm’s significant foray into the public markets.

The transaction also holds the potential to pave the way for Paytm’s future endeavors. According to experts who have analyzed the transaction, the move could facilitate regulatory approvals for non-banking financial services and expedite the application for a payment aggregator license.

Moreover, the structure of the deal has sparked intrigue; analysts have noted its resemblance to a deferred purchase transaction, where Resilient issues debentures against stock held by Antfin, enabling scheduled payments between the two entities. 

Notably, Paytm has no debt obligation, and the deal merely alters the shareholding structure. Paytm’s stock price experienced a surge of 6.9%, closing at Rs 850.75 on the Bombay Stock Exchange (BSE) following the announcement.

The strategic shift, however, aligns with Paytm’s broader efforts to have not only more control over its operations but also by reducing the influence of Chinese entities (Ant Financial), which would help Paytm to strengthen its position in the Indian financial landscape, a significant step towards addressing foreign shareholding-related challenges (Indian govt) that have hindered the company’s ambitions, including obtaining lending and payment aggregation licenses.

As Paytm’s business continues to expand, evidenced by a reported gross merchandise value (GMV) of Rs 1.47 lakh crore in July 2023, it’s evident that Shekhar Sharma’s strategic move could shape the company’s trajectory for years to come. 

Future Plans

This transaction has broader implications, raising questions about Paytm’s future plans; after the buzz of the initial public offering (IPO) and its dismal performance and subsequent failure, many are now wondering if Paytm is gearing up for a fresh attempt at raising capital through a Follow-On Public Offering (FPO). 

Shekhar Sharma’s increased control over the company may signify a renewed momentum to steer Paytm towards new avenues of growth, including diversification into non-banking financial services and payment aggregation.

Paytm IPO, A Debacle Of Massive Proportions & Overvaluation

In an article dated February 7, 2022, Dr Rajendra M Ganatra discusses the perceived overvaluation of Paytm’s IPO. The IPO, which took place in November 2021, stirred controversy due to the stark difference between the initial offer price and the stock’s subsequent market performance.

Here are a few highlights

• The IPO, which amounted to a substantial Rs18,300 crore, was characterized by an offering for sale from existing shareholders, including the company’s promoter, Vijay Shekhar Sharma. 

• The stock was offered at Rs2,150 per share, and following its listing, it faced a tumultuous journey in the market. Despite the initial optimism that Madhur Deora, Paytm’s Group Chief Financial Officer, expressed that the IPO was priced to ensure profits for all, the stock quickly spiralled. 

• It was listed at Rs1,950 and reached a high of Rs1,955, only to plunge and close at Rs944.50, marking a decline of more than 50% from its initial offering.

The article questions the reason behind the apparent overpricing of the IPO and its subsequent market underperformance while exploring various valuation methodologies, drawing on historical theories and models that have been used to evaluate securities, such as Benjamin Graham’s work in the 1920s, John Burr Williams’s Theory of Investment Value, and modern frameworks like the Capital Asset Pricing Model (CAPM).

The author proposes that the overvaluation is quite evident in Paytm’s case, particularly given the company’s history of losses and while it is true that the IPO was backed by large payments and financial services revenue, which exhibited positive growth, the commerce and cloud services segment showed a negative two-year compounded annual growth rate (CAGR) of 32.8%. 

Therefore, the article clearly discusses the challenge of valuing startups, especially those that have yet to break even without clear earnings and profitability trends.

The author analyzes the IPO’s valuation process and points out that while the initial investment cost for several private equity (PE) funds and investors was calculated through intensive negotiations based on discounted cash-flow models, the rationale behind the final IPO pricing was not adequately justified in the Red Herring Prospectus (RHP) and this lack of transparency may have contributed to the stock’s steep decline.

Dr. Ganatra further notes that Paytm’s business model requires significant growth in revenue and a reduction in operating costs to achieve profitability. While revenue growth is evident, the need for consistent decreases in operating costs has not been consistently achieved.

Therefore, in a nutshell, the author asserts that the Paytm IPO was significantly overpriced and expresses hope that regulatory authorities such as the Securities and Exchange Board of India (SEBI) will enforce greater transparency in IPO pricing. 

Companies should share both the potential upside and downside valuations to better inform investors and prevent unwarranted overvaluation. It also proposes that market intermediaries, like merchant bankers, should be required to engage in market-making activities for a certain period after listing to ensure fair pricing and investor protection.

Lessons from Paytm’s IPO Plunge

Startup funding constitutes the financial infusion necessary for establishing and sustaining a business; the monetary investment supports various aspects such as inventory, office space, marketing, manufacturing, product development, and expansion. 

One of the routes to raise capital is through an Initial Public Offering (IPO), where a private company releases fresh shares of stock to the public for the first time, thus enabling equity funding from the general public.

A report unveiled in November 2022 brought to light a stark reality regarding startup companies and the state of IPOs. 

Investors were jolted by the disappointing outcomes of the top five largest IPOs in 2022, which collectively eroded a staggering INR 3.5 trillion in market value. These much-anticipated IPOs initially thought to be game-changers, turned out to be massive disappointments, resulting in substantial losses for public investors.

Similarly, even the celebrated Paytm, often hailed as India’s fintech trailblazer, fell short of expectations. With an ambitious and complex business plan, Paytm’s market capitalization, once at a pinnacle of INR 1.2 trillion, plummeted to INR 396 billion, leading to an alarming wealth loss of INR 800 billion.

The substantial losses suffered by investors prompted a critical examination of the IPO frenzy in 2022; many investors poured funds into these IPOs, driven by the fear of missing out (FOMO) and enticed by the allure of quick gains, only to confront the harsh realities of market dynamics and company performance.

The expert analysis stresses that thorough due diligence and a profound understanding of a company’s fundamentals are imperative for making informed investment decisions. The initial excitement surrounding IPOs often obscures the inherent risks, which can result in significant losses for inexperienced investors.

Paytm’s IPO journey has been marred by unfortunate records. On its first day as a public entity, Paytm experienced the ignominy of becoming India’s worst-performing large IPO. This trend continued as it completed a year on the stock markets. In fact, Paytm has now achieved a global distinction as the world’s worst-performing large IPO in the past decade. With a 75% drop in share value since its listing a year ago, this downturn surpasses even notable declines such as Spain’s Bankia SA’s 82% drop in 2012.

Paytm’s investors’ downward spiral has persisted, with attempts to reverse the trend proving feeble. The company went public at a price of Rs. 2,150 per share but now trades at just Rs. 450, signifying a drastic 75% reduction in value over the past 12 months. 

Paytm’s roller-coaster journey in the stock market is the perfect example of the importance of investor caution, thorough analysis, and a realistic perspective while navigating the dynamic world of startup funding and IPOs.

Follow-on Public Offerings (FPOs) A Strategy to Raise Equity Capital?

While IPOs involve the initial sale of shares to the public, FPOs, or Follow-on Public Offerings, extend this concept by offering additional shares to the public after the IPO. 

In essence, FPOs serve as secondary offerings that allow companies to raise more equity capital from institutional and individual retail investors. 

Motives Behind FPOs

Follow-on public offerings serve multiple purposes, such as raising funds, reducing debt, and diversifying shareholders.

Fundraising, FPOs enable companies to secure additional capital when necessary. These funds can be directed towards funding new ventures, launching projects, or supporting business expansion. The public’s participation through FPOs contributes to the company’s growth trajectory.

Debt Reduction,  Companies may opt for FPOs to alleviate their debt burdens. The capital raised from FPOs can be used to repay debts, subsequently improving the company’s debt-to-value ratio.

Shareholder Diversification, FPOs also facilitate the inclusion of a diverse set of shareholders when existing stakeholders decide to sell their shares. This brings new perspectives and ownership to the company.

Types of FPOs

Dilutive FPOs, In this scenario, a company issues new shares, leading to an increase in the total number of shares available. This results in a dilution of the ownership percentage held by existing shareholders.

Non-Dilutive FPOs, Unlike dilutive FPOs, non-dilutive FPOs involve the offering of existing non-public shares to the public. No new shares are issued in this type of FPO.

Implications for Investors

Review Information; Investors can access comprehensive information about companies issuing FPOs, including performance reports and management details, aiding informed decision-making.

Affordability, FPOs often offer shares at a discounted price, increasing demand. This can be an attractive opportunity for investors interested in a company’s shares.

Understand Motivations, In the case of non-dilutive FPOs; investors should investigate why existing shareholders are selling shares. This provides insights into the company’s direction and intentions.

Evaluate Future Plans, For dilutive FPOs, understanding how raised funds will be utilized is crucial. This knowledge helps determine potential earnings per share.

In retrospect, this transaction seems to be not just a financial move but a strategic one that could reshape Paytm’s destiny and, perhaps, spark a revival of the company’s ambitions on the public stage. 

The intrigue surrounding this deal will likely persist, leaving us all eager to know if this move will indeed lead to an FPO in the future.