How to make money with India's four-way payments: India's regulatory heavy-handedness hits fintech giants

A recent crackdown on a leading Indian fintech company has sparked investor unease and served as a reminder that New Delhi may take sudden actions that could have a significant impact on the company and its market capitalisation, according to an article published on 17 March on the Wall Street Journal website, Reference News reported on 20 March.

Paytm, an e-commerce company in the mobile payments space, has been at the forefront of India's shift to mobile payments and its investors include Warren Buffett's Berkshire Hathaway. A directive issued by the Reserve Bank of India (RBI) has virtually paralysed Paytm's banking subsidiary, with serious repercussions for the company. Since 16 March, the bank has been unable to carry out most types of transactions.

Paytm's parent company One97 Communications holds a stake of 49% in Paytm Payments Bank and is dependent on this bank to develop new revenue streams. One97's shares tumbled after the RBI issued a directive in late January citing persistent violations by the bank.

Paytm is currently in a crisis management phase. Company founder Vijay Shekhar Sharma described the directive as "a speed bump" and said Paytm and its banks are taking steps to address regulatory issues. However, the regulatory issues have overshadowed the company's prospects in the face of uncertainty over Paytm's payments bank, and the company's market capitalisation has fallen to around $15% of the nearly $19bn valuation it was valued at at the time of its 2021 initial public offering.

Monish Pabrai, co-founder of Iron Pillar, a US-based venture capital firm, said, "Investors don't like surprises." Prabhraj also mentioned that they try to avoid investing in fintech startups due to regulatory uncertainty.

The government led by Indian Prime Minister Narendra Modi has emphasised a crackdown on tax evasion and money laundering, leading to greater scrutiny of the financial sector. The sector is now home to thousands of fintech companies, which some experts believe face lighter regulation.

Foreign companies have also expressed concern about possible unintended regulatory measures in other areas.

The U.S. International Trade Administration, an agency that supports U.S. businesses abroad, recently listed a number of challenges faced by companies doing business in India, including opaque or unpredictable regulations and tariffs.

One such measure came in August last year. At that time, India's Ministry of Commerce and Industry suddenly announced that the import of laptops and other personal computer equipment would require a licence, complicating the import process. After causing an uproar, the Government eventually watered down this new requirement.

In 2020, India caught users off guard when it banned 59 apps on national security grounds. Since then, India has banned dozens more apps.

Internet policy experts say that when India issues a ban, it should provide more public notice and make more information about the process publicly available.

An insider revealed that Paytm Payments Bank's failure to address the compliance issues raised by the government earlier led to further action by the government. Analysts believe that the stiff penalties imposed on the bank and the targeting of a single entity shows that the RBI will not tolerate violations. A Mumbai-based banking analyst Hemindra Hazari said, "This is a warning to the entire industry."