Blood Bath As Paytm Shares Crash More Than 42% In 3 Days, Investors Lose Rs 20,500 Crore; To Little To Late?

Paytm saw its shares plummet by 10% on Monday to hit the lower circuit limit at Rs 438.35 on BSE.

The decline comes amidst a deepening regulatory crisis, with fresh allegations of money laundering and an investigation by the Directorate of Enforcement (ED) surfacing.

Over the past three trading sessions, the stock has shed 42.4% of its value, equivalent to a staggering Rs 20,500 crore loss in market capitalization. In response to consecutive days of 20% losses in Paytm, stock exchanges have adjusted the lower circuit limit to 10%.

Rajesh Palviya from Axis Securities advised against attempting to “bottom fish” at this point, cautioning that the market is still grappling with the unfolding news. However, he noted that investors who remain invested in the stock are eager to exit.

Previously optimistic about Paytm’s journey towards profitability, brokerages have shifted their stance to sell recommendations in the aftermath as Paytm Payments Bank faces a significant challenge following the Reserve Bank of India’s (RBI) ban imposed on January 31.

Additionally, reports have surfaced indicating that Paytm has been under ED investigation since 2021 for suspected money laundering and involvement in illegal betting activities.

The Fire Fighting
As Paytm contends with the aftermath of the RBI’s actions, its leadership conducted meetings with senior executives over the weekend to address concerns and reassure employees about the company’s future.

The meetings aiming to clarify the company’s stance amid circulating speculations consisted of two town hall sessions with senior figures from Paytm Payments Bank and One97 Communications.

According to executives present at the meetings, discussions primarily revolved around countering various theories and outlining the company’s intended course of action.

Paytm is presently awaiting regulatory approval to proceed with transitioning backend bank accounts to alternative institutions.

While the specific rationales behind the RBI’s decision were not disclosed during the townhall meetings, the team at One97 Communications has been primarily assigned the task of developing backend systems capable of facilitating the transfer of payment settlement mechanisms from Paytm Payments Bank to alternative banking partners.

According to reports, Yes Bank, Axis Bank, and HDFC Bank are among the three financial institutions that are considering assuming responsibility for Paytm Payments Bank’s settlement systems for UPI payments.

A spokesperson further noted that, as previously communicated to the exchanges, Paytm is actively pursuing the expansion of partnerships with third-party banks to enhance the distribution of payments and financial services.

Transitioning Business Model
“As a bank, we previously maintained significant oversight over the payments process; however, as a third-party application, our focus now shifts to ensuring transaction success,” remarked another executive.
“Our top priority at present is to minimize any inconvenience to our users,” he emphasized.

In response to regulatory actions, One97 Communications, the operator of the Paytm application, announced plans to transfer its business operations from the payments bank to two or three alternative lenders.

Internally, Paytm employees are grappling with uncertainty and challenges, while the leadership has yet to fully elucidate all the precise factors contributing to the regulatory measures.

Concerns Regarding Business Impact
Since March 2022, Paytm Payments Bank has been under embargo, prompting Paytm to redirect a significant portion of its new acquiring business to other banks.

Despite this, the subsidiary banking entity remained a vital settlement engine for payments initiated by Paytm customers. However, this reliance will cease after February 29.

A senior industry executive familiar with the matter expressed concerns about the potential impact on user experience, emphasising that Paytm’s distinguished reputation for higher transaction success rates was primarily attributed to its banking license.

Hence, with the absence of this banking component, significant architectural redesigns may be necessary, potentially leading to increased transaction failures starting from March.

Nevertheless, during an analyst call on Friday, Paytm’s founder, Vijay Shekhar Sharma, exuded confidence, citing precedence in transitioning from one bank to another. He also expressed trust in his technology teams’ capabilities to tackle the upcoming challenges.

Regulations Versus Innovation
Currently, the prevailing message within the larger teams at Paytm is that the leadership is awaiting further guidance from the RBI.

Internally, there is speculation that the regulator’s stance is perceived as being ‘anti-innovation.’
While, some individuals within the company believe that although Paytm may have pushed regulatory boundaries in certain areas, it was primarily aimed at enhancing the customer experience.

One individual emphasised a fundamental aspect of Paytm’s user-friendly approach, emphasizing that the platform streamlines payment processes without requiring users to specify payment methods such as IMPS, NEFT, or RTGS. Instead, it automatically routes transactions based on factors such as traffic and transaction amount.

As the bank navigates regulatory challenges, One 97 Communications, Paytm’s parent company, is actively engaged in disentangling itself from the current situation while simultaneously seeking to expand its popular mobile app.

However, the extent to which it can disentangle its decades-old payments business from these regulatory issues remains uncertain, posing a significant question for the company’s future.

Morgan Stanley Sees Opportunity
Meanwhile, in a strategic move amidst the ongoing crisis surrounding Paytm, Morgan Stanley demonstrated confidence in the fintech giant by purchasing shares worth ₹244 crore in its parent company, One97 Communications.

The acquisition, representing a 0.8 per cent stake, stresses Morgan Stanley’s optimistic outlook on Paytm’s potential for recovery and growth.

The transaction, executed through Morgan Stanley’s affiliate, Morgan Stanley Asia (Singapore) Pte – ODI, saw the acquisition of 50 lakh shares on the National Stock Exchange (NSE) at an average price of ₹487.20 per share.

This substantial investment amounted to a total deal size of ₹243.60 crore. Despite the significance of this acquisition, pertinent details regarding the sellers involved in the transaction have been kept confidential.

The Viewpoint

The story surrounding Paytm’s crisis extends beyond the financial transactions and regulatory measures, and is an example of broader discussions regarding compliance, regulatory boundaries, and corporate responsibility.

A notable point amidst this turmoil is the characterization of serious non-compliance with regulatory requirements as merely pushing regulatory boundaries.

This perspective also reflects on a potential tendency within certain media circles to downplay the severity of regulatory infractions, adopting a more sympathetic stance towards non-compliance.

Additionally, the description of the Reserve Bank of India’s (RBI) actions as a mere “speed bump” by Paytm’s founder, Vijay Shekhar Sharma, offers insight into the mindset prevalent within the company’s leadership.

While Sharma’s characterization may reflect a resilient and optimistic outlook, it also raises questions regarding the company’s approach to regulatory compliance and governance, particularly in the context of operating a banking institution.

Indeed, the operation of a bank necessitates a rigorous compliance mindset, with adherence to regulatory standards being paramount to maintaining financial stability and consumer trust.

Why Investors Bleed Again And Again?
Yet again, investors are left to bear the brunt of the inefficiencies in regulatory oversight, presented by instances where companies like Paytm face crises due to alleged non-compliance with regulatory standards.

This recurring pattern of regulatory lapses not only undermines investor confidence but also raises questions about the efficacy of regulatory bodies such as SEBI (Securities and Exchange Board of India) in safeguarding investor interests.

In the case of Paytm, concerns about compliance and regulatory oversight have come to the forefront following allegations of serious non-compliance and regulatory breaches.

Such incidents not only result in financial losses for investors but also erode trust in the regulatory framework tasked with ensuring transparency, fairness, and accountability in the market.

Investors who entrust their capital to companies like Paytm with the expectation of responsible governance and regulatory compliance often find themselves at the mercy of regulatory actions that impact the value of their investments.

This recurring cycle of regulatory scrutiny and market turbulence stresses the need for more robust oversight mechanisms and proactive regulatory interventions to prevent such crises from occurring in the future.

Moreover, the perceived leniency or delay in regulatory action can exacerbate investor concerns, leading to heightened volatility and uncertainty in the market.

Investors rightfully expect regulatory bodies like SEBI to swiftly address instances of non-compliance and enforce regulatory standards to maintain market integrity and protect investor interests.

Eventually, the effectiveness of regulatory oversight plays a crucial role in shaping investor confidence and market stability.

By timely addressing deficiencies in regulatory enforcement and promoting greater transparency and accountability, regulatory bodies can mitigate the risks associated with corporate governance failures and safeguard investor interests in the long run.

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