Go Big, Then Go Bust. How Paytm Is Dying A Rapid Death? The Impact of Regulatory Non-Compliance and Leadership Arrogance

Paytm Epic Rise and Fall. What Went Wrong for India’s Digital Giant?

Go Big or Go Home is an American saying that motivates people to do something big. About 10 years ago, this saying entered the Indian startup ecosystem. And the credit for popularising this saying goes to Vijay Shekhar Sharma, founder of Paytm. There is no better brand ambassador than this phrase.

This phrase is printed on the walls of his office on his coffee mug. It is as if this phrase is printed in his mind. He has repeated this phrase in every interview in the past few years. In 2017, the video of Paytm’s CEO and founder Vijay Shekhar Sharma went viral. The Excitement was seen as he was celebrating Paytm’s success.

He famously said, “Those who are not with us, will cry.” But sadly, 7 years later, the situation has completely changed. Those who are with Paytm are crying. Over the last few months, a horrific crash of this company took place.

On 30th January, the stock price of this company was at ₹760. Today, it has fallen to below ₹450.

What is the reason behind this?

Paytm began its journey in 2010. But initially, it was just a mobile recharging platform. An app through which one could recharge their phone and pay landline bills. The company gradually added more features to its app. It was only in January 2014 that

Paytm Wallet was launched. With this, a person can pay online using Paytm. By 2015, it was possible to pay for metro recharges, electricity, gas, and water bills. But the real jump in the company’s popularity was seen only after 8th November 2016. 

Controversies Surrounding Paytm’s Government Connections

That day, when demonetisation happened, “₹500 and ₹1,000 currency notes were declared no longer legal tender from that night.” The very next day after demonetisation, the front-page ads in many newspapers across the country looked like this. “Paytm congratulates Honourable Prime Minister Shri Narendra Modi on taking the boldest decision in the financial history of independent India. Now, no ATMs, use Paytm.” 

The first controversy about Paytm was raised here.

People questioned whether Paytm has any link with the government. Using the Prime Minister’s face in this way while advertising their platform. The decision of demonetisation, which was said to be secretive, was declared on 8th November at 8 pm. So how did it happen that the very next day, in the morning newspaper on 9th 

November, this was the front page ad? Did this company already know that demonetisation was going to happen?

Whatever happened, one thing was clear. Paytm benefited a lot from this decision. According to Euro Money’s report, before demonetisation, Paytm had 125 million customers. But only after 3 months of the demonetisation, Paytm had approx 185 million customers. 

The CEO of this company, Vijay Shekhar Sharma, did not miss the opportunity to capitalise on this opportunity. Paytm hired more than 10,000 agents to distribute their QR codes to local shops and vendors. Shopkeepers were encouraged in every city to use Paytm. The company was growing tremendously. 

But around this time, there were 2-3 other controversies. One was Paytm’s Chinese link. In 2015, a Chinese company named Alibaba invested $680 million in Paytm, and a 40% stake in Paytm went to this Chinese company. Alibaba’s founder is Jack Ma, and Vijay had said that he was his hero. He had stated to the Financial Times newspaper. “I became totally interested in China, Alibaba, and Jack – all three things.”

The Chinese Investment and Criticism Faced by Paytm

Everyone is aware of the recent relations between India and China. China is repeatedly intruding on the Indian border. In 2017, the Doklam border standoff took place. Many people have criticised Paytm for this. Claiming that the company pretends to be a patriot when they want to sell something. But they have been taking Chinese funding secretly. Because of this criticism, the Chinese stake in the company was reduced. In 2023, Vijay transferred about 10% stake back to himself, and the Chinese stake in the company is around 13.5% as of now.

In May 2018, the next controversy arose regarding Paytm when the investigative news agency CobraPost conducted an undercover operation.

Their undercover reporter went to meet the Vice President of Paytm, Ajay Shekhar Sharma, Vijay Shekhar Sharma’s brother. When he was asked

if he would spread the propaganda of a political party through the app, he happily accepted. “There will be videos of Guruji too, there are other things as well, I will give those to you later…” “We’ll take care of all of that if RSS tells us to. Because loyalty to RSS runs in our blood.”

He went on to say that when the government asked them for the data of some Paytm users in J&K during the stone pelters, they happily gave the data to the government. “When our operations were shut down in J&K due to the stone pelters, the PMO called us personally asking us to hand over data to them, of the Paytm users.” But nothing significant happened with these controversies. The company kept growing very fast.

Many companies don’t care about people’s data. They sell citizen’s data to other companies. Especially online, it happens a lot. Citizen’s data is used to create a digital profile so that people can be shown online targeted ads. 

Paytm Payments Bank: Launch and Regulatory Issues

In 2017, Paytm launched Paytm Payments Bank. They started offering banking services. Payments Bank is like a bank to some extent. People can create a bank account, deposit money, and get a debit card. But compared to a normal commercial bank, there are some important differences. Payments banks focus mostly on digital services. There are very few physical branches of payment banks. And according to RBI’s Rules, payment banks cannot offer credit card and loan services. 

Normal commercial banks like HDFC, SBI, ICICI, do not have any deposit limit. A person can deposit as much as they want in those banks. But RBI has prescribed a limit for payment banks. A person cannot deposit more than ₹200,000 in these banks. Paytm’s Payments Bank largely causes the current state of Paytm. RBI, the Reserve Bank of India, is the central bank of the country. It decides the monetary policy of the country and also works for printing money.

All the banks and financial institutions in the country have to follow the rules and guidelines prescribed by the RBI. So, on 31st January 2024, the Paytm crash happened because the RBI imposed operational restrictions on Paytm’s Payments Bank. RBI said that Paytm’s Payments Bank kept violating the rules repeatedly. 

RBI’s Operational Restrictions and the Paytm Crash

There was ‘persistent non-compliance’ by Paytm. And that’s why the RBI put restrictions on the bank. After 29th February 2024, Paytm’s Payments Bank can’t accept any new deposits. There can’t be money top-ups in customer accounts. New customers can’t be onboarded. RBI said that all the nodal accounts with this Paytm Payments Bank should be closed by 15th March 2024.

Nodal accounts are those accounts which are used by e-commerce and online services businesses. As far as Paytm Wallet is concerned, a person can use their existing balance, but after 29th February, they can’t deposit any more money in it. So, this is a major decision by the RBI. And such decisions are not taken in an instant. It’s not like RBI randomly decided one day to take action on Paytm and implemented these decisions. In fact, there is a very long history behind this.

The fact is that Paytm was time and again warned by the RBI for years, but it still didn’t rectify its actions. In November 2017, Paytm’s Payments Bank was launched and in June 2018, RBI issued the first warning. An audit found that Paytm was not following the anti-money laundering regulations properly. The identity of the customers who made their accounts with their bank was not being verified properly by Paytm. 

The KYC, or Know Your Customer compliance wasn’t adhered to by Paytm. So RBI told Paytm to stop onboarding new customers until it fixes all these issues. Paytm took some action regarding this warning because, in January 2019, RBI allowed Paytm to resume onboarding customers. The restrictions were removed. But after 2.5 years, in October 2021, came the next big shock. A fine of ₹10 million was imposed on Paytm. Because while filling in their licence application, they submitted incorrect information and documents. 

The issues that RBI had flagged before customers were not being verified properly, regulations were not being followed properly, and the same issues were seen again. Once again, customer onboarding had to be stopped. In October 2023, another huge fine was imposed on Paytm. This time, it amounted to ₹50 million. RBI hoped that after two warnings and two penalties, Paytm would meet the regulatory requirements and start verifying its customers properly. 

Persistent Non-Compliance with RBI Regulations

But even after all this, Paytm did not take these seriously. And for this reason, on 31st January 2024, RBI had to take concrete steps. Since Paytm could not follow the rules and regulations properly, RBI had to stop its operations. RBI’s findings were very shocking. According to CNBC, Paytm allowed hundreds of thousands of customers to open bank accounts with them without proper KYC documentation. There were thousands of cases where thousands of customers had opened multiple accounts using the same PAN card.

In some accounts, transactions were worth millions of rupees. Here, the risk of potential money laundering was evident. It is possible that money laundering was taking place through Paytm. Outlook reported that, according to an analyst, Paytm had around 350 million wallets. Of which around 310 million wallets are inactive, no one is using these. And in the remaining 40 million wallets, most of them have no balance or very little balance. Because of this, they can be used like mule accounts.

A Mule account is an account that is used for illegal activities, like money laundering. After this, there are concerns about data privacy too. RBI said that Paytm’s parent company, One97 Communications Ltd, there is no operational segregation between it and Paytm Payments Bank. There was cash flow between the two, which was not disclosed in the financial statements. So many rules and regulations were ignored. 

Is the arrogance of their CEO, Vijay Shekhar Sharma, responsible for this to some extent?

He gave many interviews to media channels. This arrogance was seen in his words in those interviews. “If you fundamentally believe that Paytm is #3 payment player, that is where the beginning of the problem is in understanding.” “I’m surprised that people don’t know this in this country, but we make profit, so it is.” “Somebody who has not met us and has an opinion on us is not my opinion to keep an opinion on that.”

After RBI’s announcement on 31st January, a commotion broke out. People started taking out the money they had invested in Paytm. So, Paytm’s stock crashed very fast. To calm people down, Paytm posted on its social media handles that there was nothing wrong. On 2nd February, Vijay Shekhar Sharma tweeted this. 

“To every Paytmer, Your favourite app is working, will keep working beyond 29th February as usual… For every challenge, there is a solution and we are sincerely committed to serve our nation in full compliance. India will keep winning global accolades in payment innovation and inclusion in financial services.” As it is noticed, once again, patriotism was used as a shield here. ‘Don’t see us as a company, see us as patriots serving the nation.’ 

Using India as the shield, Paytm tried to hide behind it. This statement reminds of a quote, “Patriotism is the last refuge of a scoundrel.” It is advised to be wary of such companies which rely too heavily on nationalism. A few years ago, there was a phone called Freedom 251. 

They printed India’s national flag on the back of the phone. It was sold as the ‘world’s cheapest phone’, but it turned out to be a big scam. If a company’s products and services have intrinsic value, they sell them by promoting those values.

But if they don’t have much to say about their products or services, then patriotism is used as a selling point. Urging people to buy their product just because they are Indian. Because they are an Indian company, they use it as the only reason why people should buy their product. 

So the question is, what will happen next? 

Internally, the employees of the company are facing a lot of uncertainty. They are not getting much clarity from the leadership about what will happen next. Economic Times reported that an executive of the company told them that their business model might change. Now, instead of being a bank, they might try to become a third-party payment app. 

So they will have to change some things on the back end. And they will have to make the change in a limited time. While looking at Paytm’s annual report to check how much it has earned each year, it can be seen that it has always been a loss-making company since its shares were listed on the stock market.

• In FY 2021, the company incurred a loss of ₹16 billion. 
• In FY 2022, a loss of ₹15 billion.
• In FY 2023, a loss of ₹1.7 billion.

The good news was that year after year, the company’s losses were decreasing. So, it could have been expected that next year, that is, this year, in FY 2024, the company would earn its first profit. But now, after everything that has happened, it doesn’t seem easy. The company expects that this year, the company’s loss could increase by ₹3 billion to ₹5 billion. Paytm has revealed this to the public, saying that they will now comply with the guidelines issued by RBI.

However, after this announcement, the company’s stock price fell further. “What is the path to profitability?

When will Paytm make money? 

Vijay Shekhar Sharma will have to come up with better answers to these questions if he wants to convince people. Actually, convincing people will be the biggest challenge for Paytm. An average person is very picky about choosing a company. And the public’s trust plays an important role here. Once people select their toothpaste, they decide that they will use that company’s toothpaste forever.

They don’t change their mind easily. Here, they will be more cautious as this involves their money and banking abilities. Bringing customers back won’t be easy for Paytm. But convincing customers will come later. First, Paytm will have to convince the RBI. That won’t be an easy task.  

But there is light at the end of the tunnel. A way to get out of this can be to have another company buy Paytm’s wallet business. A Business Standard report suggests that HDFC Bank and Jio Financial Services might just do this. But Jio has denied this speculation, saying that they have no intention of doing so. And anyway, before executing such a sale, they’d need RBI’s approval.

Impact of RBI’s Actions on Paytm’s Customers

The work was going on like in the air of any company. Companies come and ask for a certain amount of valuation and somehow fool the retail investors. They are also saying that if people get any proof, then they will also probe money laundering. Paytm is going through a bad time. 

And in such a situation, many people are extending emotional support to Vijay Shekhar Sharma or Paytm. By telling the actions of the RBI as unfair, they are hoping that Paytm will bounce back. Of course, the people of that community, fellow entrepreneurs, will support them. But as retail investors, as customers and as citizens of this country, people’s opinions are the opposite.

Whatever is happening wrong with Paytm today, people think it is happening because of its actions. If this is the condition of the so-called pioneer of India, then what will happen to the rest? This company was supposed to be the best. 

There was so much praise in digital payments. After making such a big brand, if this company has not followed the regulations of RBI for 5 years and on multiple occasions betrays its customers, investors and regulators.

How can a bank run its business in a very local way? How can the RBI rules be broken continuously for 5 years? In order to grow quickly, in order to take market share, it has ruined everything. 

Impact on Retail Customers 

If a customer’s account is in Paytm Payments Bank and their money is in it, then they can withdraw it. There is no problem. Only after 29th February, new money cannot be added to it. Only cashback, refund or interest will be added to it. To be precise, if anyone has any loan going on whose EMI is deducted from the Paytm Payments Bank, then a person can change it. Otherwise, the EMI can default.

Once the money is finished in that account, then people will not be able to add new money. One more thing to keep in mind: if a person has a UPI ID of Paytm Payments Bank, means written at the back of it, @Paytm, then that will also not work because Paytm Payments Bank used to support UPI, unlike Google Pay, Phone Pay, Paytm was not a third party operator, it had its own UPI infrastructure of Paytm Payments Bank, which is not going to work now onwards. 

This means that now Paytm will also have to become a third party operator, will have to tie up with some other bank, and customers will be able to use UPI by using the Paytm app, just not the one that ends with @Paytm.

Impact on Merchants

There are 37 million merchants of Paytm, there is Paytm QR in everyone’s shop, there is a sound box, all that can be useless. The merchants who have put Paytm’s QR or sound box, the majority of the merchants have a bank account in Paytm Payments Bank. So Paytm has to convince all the merchants to open an account in another bank. 

They will send a new QR code and put it in the shop. In this process, many merchants are likely to switch over to some other QR code. And the merchants who had put Paytm’s QR code only, but their bank account is in another bank, those people also have a loss because RBI blocked Paytm’s nodal account.

When any customer pays the merchant, then that payment first goes to a nodal account, after that, it is credited to the merchant’s account. Impact on Retail Investors

Impact on retail investors

People who have bought its shares, it’s bad news for them. Paytm’s share has crashed more than 80% from its IPO listing price at the time of the RBI ban. A total of 68 mutual fund schemes have invested around 2,000 crores in Paytm stock. So, if a person did not buy Paytm’s share directly but invested through mutual funds, then there will also be a dip in their portfolio.

At the time of the IPO, Paytm said that the share price of Rs. 2150 was very cheap because they wanted to give value to retail investors. Vijay Shekhar Sharma also said, “we are just gathering ingredients, not even started cooking yet. We don’t even have an appetiser yet. We have not even started properly, see what happens next.”

When people asked how Paytm earns money, Vijay Shekhar Sharma said, “We acquire customers for A. A makes money while more money is made on the derivatives of A which are B, C and D. And then there is an opportunity of E, F, G. It is an A to G business model, which is a long number of things that need to be understood. Because stock markets in India haven’t seen anything like this. It is what it is.”

Then what happened? The share price of Rs. 2150 fell to Rs. 480 also not the current Rs. 480, it has fallen once before. At that time, And what Paytm did?

Share buyback. In the range of Rs. 600 to Rs. 800, Paytm felt that the shares were selling at a low price, let’s buy them back. Only one year had passed since the money was raised in the IPO. And there are two reasons for raising money.

• First, they are giving exit to their old investors 
• and second, they will grow the company with money.

So the money raised from the public for the growth of the company, How are they doing share buyback with the same money? That is, Paytm sold its stock at Rs. 2150 and bought it back at Rs. 600 to Rs. 700. Does it mean that they raised the money but did not have the plan to grow the business at all?

Going forward

First, Paytm did Wrong to Its Retail Investors. After that, they did wrong to their customers by opening their bank accounts without telling them and confusing them in the Paytm app. And after that, for 5 years, due to continued negligence, it broke people’s trust. Trust in the Indian Banking System. Will anyone keep their money in such a bank account where KYC is not properly maintained? 

Where, other people’s income is being reported on the PAN number. There are issues of customer data leakage, which NHAI has also banned. Only one thing has been good: people are safe. That is, the money is secure, and people can easily withdraw their money.

There should be some new rules on who should be allowed to IPO and who should not. At least, a good rule should be made for this because people can’t do anything about valuation. No matter how much valuation any company asks for and how it fools retail investors. When such things happen, that too through a pioneer, then, people may lose trust in the Indian banking system. And the banking system is the backbone of the country. Without it, no country can ever grow.