NEW DELHI: The Enforcement Directorate, which has been investigating Paytm Payments Bank, a branch of One 97 Communications, for potential foreign exchange violations, has yet to find any breaches, according to a Reuters report.
While no foreign exchange management act violations have been detected, the probe has uncovered lapses in compliance with know-your-customer (KYC) norms and issues around the generation of suspicious transaction reports, a government source told Reuters.
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There were also some issues with a suspicious transaction report not being generated by the bank, the source told Reuters, adding that the Enforcement Directorate is still ascertaining whether to bring charges for any potential violations.
Why it matters
This inquiry comes on the heels of a regulatory action by the Reserve Bank of India (RBI) that halted the acceptance of new customer funds into Paytm’s accounts, resulting in a significant 50% drop in Paytm’s share value since January 31, erasing about $3.1 billion in shareholder wealth.
As per a Bloomberg report, Jefferies Financial Group Inc has paused its analysis of Paytm citing the need for the situation to “settle down.” This move marks Jefferies as the first significant international brokerage to suspend coverage on the embattled Indian fintech giant.
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“Without a banking license, Paytm’s business model will now become similar to pure payment service providers,” analysts Jayant Kharote and Prakhar Sharma wrote in note, the Bloomberg report said. “Paytm’s focus will now move to ensuring customer retention, and we believe it will dip” into its 85 billion rupees ($1 billion) cash reserves for spends on retaining users, the analysts said.
Zoom in: Amid the turmoil, Paytm has managed to secure a crucial 15-day extension from the RBI for its wind-down period, now set for March 15. Additionally, a partnership with Axis Bank aims to ensure the continuation of Paytm’s popular services amidst the crisis.
Bernstein analysts view the extended deadline for Paytm Payments Bank as a key facilitator for the seamless transition of accounts. They regard the capability of Paytm’s merchants to continue utilizing QR codes, soundbox, and card machines as a “major positive.”
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Citi analysts expect more banking partnerships, like the one with Axis, calling them “significant positives for ongoing business”. However, Citi kept its “sell” rating on the stock, while Bernstein maintained “outperform.”
The big picture: The ongoing investigations and regulatory challenges underscore the heightened scrutiny fintech firms face in India’s rapidly evolving digital finance landscape. Despite the pressures, Paytm’s recent maneuvers highlight its efforts to navigate the crisis and maintain its operational continuity.
(With inputs from agencies)
