Why Is SEBI Upset With Paytm?

Fintech giant Paytm's parent company, One 97 Communications, has ruffled feathers with India's market regulator, SEBI. The crux of the issue? Related party transactions (RPTs) exceeding limits and lacking proper approvals for FY22. This article dives deep into the SEBI warning, Paytm's response, and the potential impact on the company.

Unapproved Deals Raise Red Flags

SEBI's scrutiny unearthed RPTs between One 97 Communications and Paytm Payments Bank (PPBL) worth a combined INR 360 crore – exceeding the approved limit. But that's not all. These transactions, SEBI alleges, bypassed critical approvals from both the audit committee and shareholders, sparking concerns about corporate governance.

What Are Related Party Transactions?

Related Party Transactions (RPTs) are business dealings between a company and its related parties, such as affiliates, directors, key managers, or their close family members. These transactions can include anything from leasing property and providing services to selling goods and extending loans. While leveraging pre-existing networks and resources through RPTs often makes commercial and operational sense, ensuring that the interests of the directors or managers align with those of the company is crucial.

Compliance Discrepancies: A Cause for Alarm

The plot thickens with conflicting narratives. One 97 maintains it adheres to listing regulations and claims the transactions were disclosed to shareholders. However, SEBI counters that the company categorized these transactions as non-material, raising questions about their interpretation of compliance procedures.

The market regulator highlighted discrepancies between the company’s claims of compliance and the transactions identified as significant related party transactions by the Board and Audit Committee. 

“The company is committed to upholding and demonstrating the highest compliance standards and shall also submit its response to SEBI,” the letter said.

As per SEBI, non-compliances were observed during the course of the examination. “The excess related party transactions (RPTs) entered into by the company and its subsidiaries with PPBL during the FY 2021-22 were conducted without the due approval of either the audit committee or the shareholders.”

It added, “On one hand, the company claimed that it had provided a cumulative numerical value of the transactions undertaken with PPBL by the Company and its subsidiaries for reference by the shareholders and that transactions between subsidiaries of OCL and PPBL do not qualify as RPTs during the FY 2021-22.”

Paytm's Reassurance Amidst Scrutiny

In response to the warning, Paytm maintains its commitment to compliance and promises a detailed response to SEBI. The company assures stakeholders that this issue won't affect its financial or operational activities.

“The warning pertains to the excess RPTs entered into by Paytm and/or its subsidiaries with Paytm Payments Bank Limited (PPBL) during FY 2021-22, which were allegedly conducted without the due approval of either the audit committee or shareholders,” the company said in a filling.

“The Company believes it has consistently acted in compliance with Regulation 23 read with Regulation 4(1)(h) of the SEBI Listing Regulations, including any amendments and updates to these regulations over time. The Company is committed to upholding and demonstrating the highest compliance standards, and shall also submit its response to SEBI. There is no impact on financial, operation or other activities of the Company pursuant to the above-mentioned letter,” said Paytm in a stock exchange filing on Monday night.

Beyond the Warning: A Challenging Landscape

This regulatory hurdle comes at a difficult time for Paytm. Recent curbs by the RBI on Paytm Payments Bank impacted its share price, and the company reported a significant net loss in Q4 FY24. To add fuel to the fire, SoftBank, a major investor, has entirely exited Paytm, incurring losses.

SoftBank's Exit from Paytm

Adding to the company's woes, Japanese tech investor SoftBank has fully exited its position in One 97 Communications. In the June quarter of the ongoing fiscal year, SoftBank sold its remaining 1.4 percent stake in Paytm, incurring a loss of $150 million. This move follows a pattern of SoftBank gradually reducing its stake in Paytm since November 2022. The Japanese investor's share in the company had dropped from around 18.5 percent at the time of Paytm's IPO in 2021 to just 1.4 percent by March 2024.

SoftBank's exit from Paytm mirrors its previous divestment from another Indian fintech venture, PB Fintech, the parent company of PolicyBazaar. Unlike its exit from Paytm, SoftBank reportedly made substantial profits from its investment in PB Fintech.

The Road Ahead: Restoring Confidence

SEBI's warning serves as a stark reminder of the importance of robust corporate governance and adherence to regulations. Paytm's ability to address SEBI's concerns and demonstrate a commitment to high compliance standards will be crucial in regaining stakeholder trust. The coming months will be a test for Paytm as it navigates a complex regulatory environment and strives to strengthen its financial performance.

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