Razorpay Payment Gateway: 'Alipay India' ordered to suspend operations, Ant Group was majority shareholder

Indian payments giant Paytm has suffered a major setback.

Paytm on Thursday announced that the Reserve Bank of India (RBI) has directed the company to discontinue its popular mobile wallet service and other operations from March, a move that will have a significant impact on the company's revenues from its primary payments business.

The news caused shares of Paytm's parent company, One97 Communications, to fall 201 TP3T on Thursday, touching the floor, and another 201 TP3T on Friday. the two-day drop reached 361 TP3T, with the shares plummeting from Rs 761.20 to Rs 487.20, and the company's market capitalisation evaporating by Rs 2,175.5 crore (roughly Rs 18.8 billion) .

Market watchers see the RBI's directive to suspend operations as a further punishment for Paytm's alleged money laundering violations.

A Paytm spokesperson said, "One97 Communications Ltd and Paytm Payments Bank have always followed the highest ethical standards. We confirm that neither we, nor the founder and CEO of OCL are under investigation by law enforcement agencies regarding money laundering."

Notably, just two months ago, Warren Buffett cleared his entire holding in Paytm, while major shareholders such as SoftBank and Alibaba Group have also opted to significantly reduce their stake in 2023.

Suspected money laundering leads to suspension of operations

On Wednesday, the RBI asked the Indian payments giant to suspend most of its operations due to persistent compliance violations and regulatory issues.The RBI said that banks handling Paytm's transactional operations must cease operations after 29 February. However, existing customers will be able to withdraw funds and utilise the balance in their prepaid cards or wallets without any restriction.

The sudden move signals growing dissatisfaction among local regulators with fintech firms and warnings of possible further action.

Reports suggest that RBI's decision to suspend Paytm's operations was primarily due to its failure to effectively manage money laundering risks.

According to the Economic Times of India, many Paytm merchants are making staggering volumes of transactions, some amounting to tens of millions of rupees, which do not match the amounts traditionally collected by merchants. There are also instances where more than a thousand wallets are associated with a single account, raising heightened concerns that Paytm facilitates money laundering.

Reuters reports that hundreds of thousands of Paytm accounts were created without proper identity verification (KYC), in violation of international anti-money laundering regulations.

In response, Vijay Shekhar Sharma, Founder and CEO of Paytm, took to social media platforms on 2 February and said, "Dear Paytmers, your favourite apps will continue to work as normal, and there will be no change after 29 February. I salute each and every user for their tireless support. There is a solution for every challenge and we are sincerely committed to serving our country and being fully compliant with the law. India will continue to receive accolades for global payments innovation and financial inclusion services - PaytmKaro is the biggest supporter." However, he did not respond further to the RBI penalty.

Paytm held a conference call after Thursday's close but failed to restore investor confidence. At least five brokerages, including JP Morgan and Citi, downgraded the stock to sell. JP Morgan cut its target price for the company by 331 TP3T to Rs 600 and Morgan Stanley cut it by 201 TP3T to Rs 555. Investment bank Jeffries downgraded Paytm's stock rating to 'underperform' from 'buy' and its target price to Rs 500 from Rs 1,050.

The RBI's directive has had a significant impact on Paytm's core payments business, which accounts for 59% of its revenues," wrote JPMorgan analyst Ankur Rudra in a report. "While it may have a lesser impact on the rest of the business, it will gradually erode the network effect and brand reputation of Paytm's 'merchant-consumer' ecosystem, unless the company is able to successfully shift its business to other banks. While the impact on other businesses may be small, unless the company is able to successfully transfer its business to other banks, this will gradually erode the network effect and brand reputation of Paytm's 'merchant-consumer' ecosystem.

According to Macquarie analyst Suresh Ganapati, RBI's directive severely hampers Paytm's ability to retain customers within its ecosystem, and could have a significant impact on revenues and profitability in the medium to long term.

Analysts said RBI's action raises concerns that Paytm's lending partners may reconsider their relationship with the company, which could hamper Paytm's efforts to achieve sustainable profitability.

Investors like Warren Buffett are fleeing in droves

Founded in 2010, Paytm began as a mobile recharge and bill payment service and has since grown to become India's largest digital payments platform, often referred to as the "Alipay of India". With more than 300 million registered users, representing half of India's internet population, and over 20 million merchants, Paytm has evolved into a full-fledged financial services platform covering digital payments, insurance and credit. Prior to its IPO, the company received investments from a number of leading organisations including Berkshire Hathaway, SoftBank, Blackstone, Ant Group, Alibaba and the Canada Pension Investment Board.

Paytm went public in India in November 2021 at an IPO price of Rs. 2,150 per share, raising Rs. 183 billion (roughly Rs. 15.7 billion), setting a record for India's largest IPO. However, the company has yet to report a profit since its IPO.

In 2023, a number of major shareholders, including Berkshire Hathaway, have liquidated or reduced their stakes in Paytm, India's "Paypal".

On 24 November 2023, Berkshire Hathaway exited the company by selling its entire stake in Paytm for about Rs 13.71 billion (about $16.4 million).

Berkshire Hathaway's subsidiary BH International Holdings sold more than 15.6 million Paytm shares at an average selling price of Rs 877.29 per share, exchange data showed.

In September 2018, Berkshire Hathaway invested $300 million to acquire a 2.6% stake in Paytm at about Rs 1,279.7 per share, public records show. The sale price of Rs 877.29 resulted in a loss of 311 TP3T per share for Buffett, totalling about Rs 6.2 crore after liquidation.

This is not the first time in recent times that Paytm's holdings have been reduced.On 17 November, SoftBank Group sold $215 million (Rs 1.54 billion) worth of Paytm shares through a block trade. SoftBank sold 29 million Paytm shares at Rs 555 to Rs 601.45 per share.

In August last year, the Ant Group subsidiary announced the sale of its 10.3% stake in Paytm. The announcement said that Vijay Shekhar Sharma, founder and CEO of Paytm, reached an agreement with Ant Gold (Netherlands) Holding to acquire its 10.3% stake in Paytm. The deal will be done at a market price of $628 million (roughly Rs 4,509 million).

Post the deal, Sharma's stake in Paytm will increase to 19.421 TP3T, while Anthem's stake will fall to 13.51 TP3T and it will no longer be the largest shareholder. At the time of Paytm's IPO, SoftBank Group was the second largest shareholder and Ant Group was the largest shareholder, public information shows.

Back on 10 February 2023, Alibaba Group sold its remaining stake in Indian fintech company Paytm for about Rs 13.78 billion (roughly Rs 1.142 billion) through a block trade.

The deal involved the sale of over 21.4 million Paytm shares by Alibaba E-Commerce Singapore at an average price of Rs 642.74 per share. In mid-January this year, Alibaba E-Commerce Singapore also reportedly sold 3.11 TP3T of Paytm shares at Rs 536.95/share in a block trade for $125 million (roughly Rs 856 million).

Although the parties did not mention the reason for the cash-out, some clues are visible in other reports.

The Global Times previously spoke to Paytm's headquarters. At that time, Amit Sinha, CFO of Paytm, told the Global Times that Ant Financial from China had invested in and provided the technology to optimise Paytm's algorithms and rules, and had designed "a payment technology platform covering about 60% of Paytm's universal capabilities". With the core payment platform infrastructure framework, QR code technology, anti-money laundering and risk control technology provided by the Chinese company, Paytm has become a "national" payment tool.

However, due to the cooling down of Sino-Indian relations since 2020, India has strictly suppressed Chinese companies and maliciously scrutinised the operations of Chinese companies in India, leading to a massive withdrawal of Chinese companies from the Indian market. The operations of Chinese companies still in India are also extremely difficult. This has caused immense damage to the economic and trade relations between the two countries and could be one of the reasons why investors like Ant and Warren Buffett no longer see Paytm as a promising investment.