The Paytm Saga | Big Story | NDTV Profit
Will India still '#Paytm Karo' amid heat on 'star' startup founders?
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00:00 Anna Inamdar, Paytm founder Vijay Shekhar Sharma is no stranger to challenges, struggles and controversies.
00:06 But the events of the last week may be the biggest hurdle the 45-year-old may have faced.
00:11 In a matter of a week, the RBI has pretty much put paid to his payments bank.
00:16 The lapses in operations are raising concerns of money laundering and trader associations are
00:22 calling out for their members to move away from the Paytm payments app.
00:27 While a clutch of startup founders have tried to paint this as a heavy-handed regulator
00:32 coming down on an innovative company, is that all there is to the story?
00:37 Are we seeing some star startup founders believing that they're above the rules?
00:43 Just think about it. A few years ago, some of these names were the most fetid in the space.
00:49 If I talk about Vijay Shekhar Sharma, I talk about Baiju Ravindran, I talk about Nashneer Grover.
00:57 Today, there are questions being raised on what they have done.
01:00 So that's what we're going to explore on the show today.
01:03 What really is happening in the startup space and more.
01:08 But let me bring in my colleague Pragati also very quickly, who's joining us for a
01:12 comprehensive timeline on the chain of events that have engulfed Paytm. Pragati, can you hear me?
01:19 Yes, Tamanna, I can hear you.
01:20 All right. Let's begin by talking about the Paytm story and what we've seen in the last few days.
01:25 Now, I want to understand what the response has been from Paytm. They've had an investor call.
01:31 There have been a bunch of news reports and an exclusive story NDTV Profit has done.
01:36 It's seeming more than very perfunctory KYC lapses, isn't it?
01:40 You're right, Tamanna. So that's what the management is saying and what is coming out
01:46 is now at present becoming a situation of management coming up and covering up a lot of
01:51 things. So I'm going to quickly take our viewers to the timeline of the entire incident as to what
01:55 has happened. RBI had clamped down on Paytm payments bank on 31st January, one day before
02:02 the presentation of the union budget. So naturally, which was already a very big event, all eyes went
02:07 towards Paytm payments bank. So RBI said that anyway, there were some sort of curbs on Paytm
02:15 payments bank. They were not allowed to onboard customers since March 2022. And now because of
02:19 this additional stringent curbs, Paytm payments bank was asked to stop deposits or credit
02:24 transaction in customer accounts and stop banking services apart from withdrawal or utilization of
02:29 balances. And for all this, Paytm payments bank was given a deadline of February 29. That is,
02:35 after this deadline, Paytm payments bank cannot indulge in any of these activities.
02:40 Right after this on 1st February, NDTV Profit, our team gave an exclusive that RBI's move was in
02:46 reality in preparation for a license cancellation of Paytm payments bank. It was a big exclusive
02:52 story that we got from our sources. And right at that time, on the same day, the management also
02:58 addressed everyone through an analyst call saying that all was well at Paytm. And Paytm or like 197
03:06 communication, the parent company and Paytm payments bank are separate entities that there
03:10 was an arm's length distance being maintained in both the between both the companies. Very
03:16 interesting bit here, because there were a lot of operational changes coming up at Paytm or 197
03:21 communications. The management said that for the time being, temporarily we are stopping the
03:26 loan giving out process while we try and understand and figure out how to go about this entire thing.
03:31 Now, soon after that, Vijay Shekhar Sharma also took to ex formally Twitter saying that
03:38 the app is working or like he said, the favorite app Paytm is working. There was nothing to worry
03:44 about and that will continue working after 29th February. So that is what has happened so far.
03:50 But interestingly, right after that, NDTV Profit came up with another exclusive based on information
03:55 from sources that why RBI had a clampdown or another clampdown on Paytm payments back was
04:02 because there were concerns of money laundering as well. So recently on Feb 4, which is yesterday,
04:09 197 communications also came up with an exchange filing saying that denying rather any allegations
04:16 of money laundering. Sure, sure. So we've had a rocky few days. Now the question is,
04:20 what are we seeing here? Because initially, there was a lot of chatter, a lot of commentary
04:25 that this is, you know, a regulator coming down very, very hard on the pioneer of the digital
04:31 payments in India. But is there more to the story? Thank you for that, Pragati. I'm joined
04:34 now by Ashwin Parekh, MD of Ashwin Parekh Advisory Services and Amit Gupta, partner at Factorial.
04:41 Welcome to both of you. And thank you so much for speaking with us. Ashwin Parekh, let me begin,
04:46 you know, with your take on the entire Paytm saga and what we are seeing right now. Keeping in mind
04:53 that the RBI had already given fair warning in 2022 when they said don't onboard customers.
04:59 Now, NETV Profits' own reports and investigations have found cases of, say, over a thousand
05:07 accounts linked to one PAN card. Are these not serious concerns? These are. Actually, you know,
05:15 I mean, there are two parts to the whole story. One is, I mean, when we say non-compliance,
05:21 I think it's important to understand what aspect of non-compliance, you know, has been observed by
05:27 the regulator and also by the system. So, I mean, if you find that KYC itself, for example, you know,
05:34 was not conducted, let's say, with a proper sort of, you know, order or a proper control,
05:42 then you have a major problem. And I'll explain why the major problem comes in.
05:47 Because not only are you encouraging money laundering in some form, because you do not
05:52 have a good track of those accounts in any case, but also without realizing you would also bring in
05:59 the problems of cybersecurity as well. Because, I mean, if these are, let's say, it's perpetrate,
06:08 if these are Chinese kind of accounts or if there was payments, you know, from out of Chinese kind
06:13 of accounts, then in that case, there could be several other threats as well. Coming back to
06:19 the point, let's say, right from the time, let's say, the RBI observed it first, they've been
06:26 regularly warning the bank and they were regularly asking the bank to regularize. Non-compliance of
06:32 order, any order for that matter, is not an acceptable sort of proposition by any regulator.
06:38 And the extent to which and repetitiveness of which it has been done is certainly not acceptable.
06:44 So when the clampdown happened and there was also a talk about saying, look, is the RBI getting a
06:50 little too harsh on a sort of, you know, on a fintech? And I thought people have to realize
06:57 that there is a vast difference between the kind of work that, let's say, a particular platform does
07:05 or a particular bank does and the non-compliance and the non-compliance records, not like one or
07:11 two occasions, a non-compliance record, people have to distinguish that. Now, in that case,
07:17 therefore, we're leaving the regulator with no choice. The regulator had to really do what he's
07:23 done. The good thing is, because it's a systemically important, I mean, in terms of the number of
07:28 customers it has and in terms of the kind of services that it provides in the payment space,
07:34 I mean, particularly after the demonetization, it really played a significant role.
07:38 Because of that, the RBI has given a certain period, so up to 29th of February, during which,
07:45 of course, the bank cannot receive any further amount in the wallet. The customers, however,
07:50 will not be in any pain. You know, they'll be getting enough time to use up their wallets
07:55 during this period or take the balances to any other bank, any other bank which provides that
07:59 wallet or any other platform for that matter. So, I mean, there are other platforms available
08:04 without naming them, who are fairly active, who've been doing very good. In fact, to be very honest,
08:09 some of the platforms have gained a huge amount of market share from out of Paytm. So, I mean,
08:15 I would certainly say, therefore, that the record of non-compliance, particularly KYC,
08:22 certainly would have brought this kind of election on the bank.
08:27 You know, now, of course, the distinction being made that this is the Paytm payments bank,
08:32 which has faced regulatory action. The rest of the business is there, but that overhang
08:38 already being seen reputationally. Now, I want to understand a different aspect of the story.
08:43 And Amit Gupta is joining us for this. Amit, great to speak to you here on NDTV Profit.
08:48 And thanks for having me, Shobhana. Thanks for having me.
08:50 And I just want to put this theme together because another startup founder who was once feted
08:57 by Juhi Ravindran is also in the news right now. He's finding it difficult to make bank,
09:01 to pay salaries. And, you know, we'll pull up all of those names on your screen as well.
09:06 I'm trying to understand what we're seeing here because some people are trying to paint this as
09:12 a crackdown on a thriving startup ecosystem. But on the other hand, serious questions being asked on
09:18 whether celebrity founders are beginning to think that they're above the rules.
09:24 Yeah, so, Thamada, you know, I mean, we are a very young ecosystem in terms of startups
09:29 compared to the Silicon Valley or even China. And for some reason, we've taken to weave as in
09:36 the founders have taken to glamour. And, you know, we like to idolize or adore these founders.
09:42 And Vijay Shekhar Sharma or for that matter, Baiju Ravindran and you took the name of
09:47 Varshneer Grover. I mean, they've all followed different yet very similar trajectories
09:52 in terms of being looked up by other founders in the ecosystem and all.
09:56 Different personalities, I would say. Vijay Shekhar Sharma, what you see now,
10:01 the outpouring of support coming in from the startup community at large, right? I mean, there's
10:06 barely anyone who's not being supportive of him. And as you rightly said, you know,
10:13 they're painting it as a clamp down on startups per se, right? Similar thing happened when the,
10:20 you know, GST was applied on real money gaming and Varshneer came down with that narrative
10:26 status. So I think somewhere down the line, it's our Indian society and culture to blame or that's
10:32 how it is, right? I mean, we like idolization of people. But personally, on Vijay Shekhar Sharma,
10:40 I think whatever has happened, right, he's had a very storied trajectory in terms of having very
10:45 humble beginnings compared to other pedigree founders who come from IITs, IIMs and so on and
10:50 so forth, right? He had very humble beginnings growing up in Naligarh, going to a normal college,
10:55 Delhi College of Engineering. Incidentally, I met him in 2014-15 while I was running an
11:02 events platform to do a cashback, a simple cashback deal. So very hands-on operator.
11:06 Now I get to the point that I'm coming at, that hands-on operator stuff continued for a few years.
11:12 I mean, he ran it like a single person entity, even though it grew. I met him in his erstwhile
11:17 office in Loida as well and I did see the enthusiasm on the floor, but still very hands-on.
11:23 Now, like Mr. Parikh correctly said, see demonetization changed everything for the
11:28 company. That front page ad next morning, no matter how it happened, just propelled them
11:34 into the mainstream thing. And their marketing was on grassroot level. We know Paytm just like
11:40 Google is almost a verb. I mean, it is a verb, no matter which app people are using, it's still like
11:47 Paytm karo, right? And there was a well laid out strategy. But Vijay Shekhar Sharma, the individual,
11:53 never let go of a day-to-day hands-on approach. And that's how his persona grew. So now what's
12:01 happening currently is we have to differentiate between the individual and the corporate
12:05 identity. I mean, people refer to it as a startup, but you have to understand it's a listed entity,
12:11 197. And Paytm Bank is a subsidiary of that. So in my opinion...
12:17 I want to come to you on the point you made about your own interaction with Vijay Shekhar Sharma,
12:22 especially after the IPO, because Paytm and VSS himself have gone through quite a journey.
12:28 It's not just the stock and the company that has been re-rated several times. It's this founder as
12:34 well. You know, the concerns began with maybe Chinese investments. The concerns have also been
12:41 about a Chinese wall or an arm's length distance between the bank and the rest of the entity.
12:47 Now we're learning that maybe some of the operations were too mixed up. Now, things like
12:54 that. Why would someone in that position think they could get away with it? I mean, you have
12:58 some of the largest banks in this country who wouldn't dare to do that. Right, right. So again,
13:04 it's the whole, you know, the rapid trajectory and the rapid growth and how it happened from 2016 to
13:11 2019, the period after demonetization. And they really went overboard. I mean, I don't have exact
13:17 figures, but at least from their own narrative, 30-40 crore people use the app. Now, whether
13:23 they're using the payments bank or the wallet. The wallet I know on a grassroots level, including my
13:29 own domestic helps use the bank and the wallet. So it's the de facto thing, right? Now, when growth
13:35 happens at such a rapid pace, and then the IPO, the ill-timed, and I call it ill-timed and we know
13:41 why it's ill-timed, right? Apart from the pricing, it was way too soon he did that. Therein comes the
13:47 Chinese angle because he wanted to give an exit to the Chinese investors, get rid of the, get rid
13:52 or at least get them out due to government pressures, geopolitical reasons, and so on and so
13:57 forth. So those structures and systems that should have been put in a place that, you know, there's
14:02 always a gap. We have other startups preparing for an IPO, and there's always a two, two and a half,
14:07 three year run up to the IPO, where they put up all these systems and processes in place to transcend
14:13 from a startup to a corporate entity. We still refer to it as a startup, which it is not. It's a
14:18 listed corporate entity, which people forget. It is surprising. There is no answer why and how did
14:26 the management think. He cannot be singularly responsible, even though, I mean, he is the CEO,
14:30 possibly chair of the board as well, but he cannot be singularly responsible. Now, therein lies the
14:36 difference between Bharatpay, which is not a listed entity, or a Baiju, no matter how much
14:42 they tried, they are not a listed entity. I think the one thing which has stood out here is maybe
14:48 because of compulsions also, is he coming out in the open and at least admitting, and that I will
14:53 take corrective measures. I mean, he has no choice anyhow, right? That is the difference between him
14:59 and Baiju Ravindran, who's quite defiant every day. It's more like a soap opera happening, right?
15:06 No, no, clearly. I mean, we are giving examples over here. We're not saying they're all
15:11 in the same boat. And I hope it doesn't go there, either. This is a company with a large value. I'm
15:17 just saying that you shouldn't be too quick to say that it's not your fault and play the victim
15:24 card. That's the simple point that I'm making. But coming to the point of the IPO, please stay on. I
15:28 have my colleague, Harsh, with us. And that's an important sort of pivot point of Paytm's journey,
15:35 the IPO, the valuation of the IPO, and the entire row that started there. From an investor point
15:41 of view, Harsh, it's been quite a rocky and disappointing experience, isn't it?
15:45 Absolutely, Tamanna. So let me first start off with the IPO itself. At IPO, the company was
15:51 valued at 1.5 lakh crore, 18,500 odd crore IPO, of which 88,500 odd crore was purely the fresh
16:03 issue. So that was the key. 10,000 crore was investors selling out. And when I'm looking at
16:10 the price itself, 2150 was the price. Now, important to note here with regard to valuations,
16:16 because at that point of time, FY21, the sales that Paytm clocked or the revenue number that
16:22 Paytm clocked for FY21 was around 3,100 crore, which was the valuation, therefore, was 45 times
16:31 sales. It was making a 1,700 crore loss at that point of time in FY21. These are some metrics
16:38 which are important to understand, because in the RHP also, Paytm had clearly specified that,
16:44 and I quote, "We have a history of net losses and we may not be able to achieve profitability."
16:50 Despite that, the IPO was 2x subscribed, and this Paytm story was painted to be a very,
16:57 very good one. Now, let me quickly also take it to what happened thereafter. The stock obviously
17:04 did not list anywhere close to IPO price. It slid to the 1,000 rupee mark in January of 2022.
17:11 It quickly slid to 550 rupees by March of 2022. And therefore, you had a significant decline in
17:19 the stock price, with investors losing nearly 75% for those who had invested at the IPO price.
17:26 Now, in April thereafter, post this March decline that we saw, the founder came out and gave two
17:33 clarifications. One, that the company was targeting to be EBITDA profitable. By EBITDA,
17:40 I mean adjusted EBITDA, as they call it, before ESOP cost, profitable in the next six quarters.
17:47 Second guidance, or rather, second suggestion he made was he would not vest his options till
17:54 the stock hit the IPO price again. That seemed to calm the nerves of investors, but the stock
18:00 had already tanked by quite a bit, right? So not really sure there. Now, what has happened?
18:06 Where do we stand as of today? Well, the company for the nine month FY24 has made an EBITDA before
18:13 ESOP of 450 odd crore. The ESOP cost is around 1,100 crore. I'm just going to try and complete
18:20 this. Restrictions posed by the RBI, the company forecasts an impact of 300 to 500 crore on that.
18:27 And therefore, this would put the company behind by at least a year when it comes to EBITDA before
18:33 ESOP profitability. And therefore, this impact is quite large. What Siti seems to therefore suggest
18:40 is that a full clarity on the reset will only be realized in the next one to two quarters. So they
18:45 are also playing wait and watch. There are too many uncertainties around investors.
18:49 Harsh, I would argue EBITDA to ESOP is the least of their concerns right now.
18:55 Sure.
18:55 We're talking about it from terms of the numbers and impact on the payments business,
18:59 the reputational risk, unfortunately runs deep. And that's what we have to see. I mean,
19:06 the company over the weekend has denied reports that there's an ED investigation on,
19:10 but we'll have to wait and watch that space. Thank you for that, Harsh. But I just want to play out
19:14 this slice of a conversation we had with Bernstein's Pranav Gundlapalli on what Paytm
19:22 could do next. Listen in.
19:23 I think it's a big blow for them in terms of losing an associate company and also brings
19:35 them on par with how most of their peers are structured in this sort of a payment platform
19:41 business. I think that edge that they had is definitely gone. I think the question now is
19:46 twofold. One is, is this the end of regulatory troubles or there's more trouble ahead? I think
19:51 that becomes a bigger question because one discrepancy then leads to questions on if there
19:57 are more to come. And the second is if there is a reputational risk, which will have rub off effect
20:03 on the other parts of their businesses. Remember, the payments bank is only responsible for a small
20:08 part of the business. So therefore, if it's just limited to that particular business, it's probably
20:15 not that material in terms of numbers. But the questions of future trouble from regulations and
20:21 rub off effect in terms of reputational risk are the bigger ones to be worried about at this stage.
20:26 So reputational risk over here is key. Ashwin Parekh, I want to come to you on this because
20:31 technically the payments business or the payments bank business could be sort of ring fenced. And
20:40 as Vijay Shekhar Sharma has said in all of his calls, he'll try and find other banks to get on
20:44 board, try to tide over that crisis. Do you think the reputational risk is what the biggest headwind
20:50 is right now? Yes. I mean, see, let's not forget that AGM as such, I mean, without the bank,
20:57 is only a platform. Now, it is a regulated platform because all fintechs which are B2C fintechs,
21:05 I mean, we have B2B fintechs where the responsibility or the onus of regulatory compliance
21:11 is with the banks. This is a B2C where they require the customers, they create wallets and
21:16 all things like those. So here what may happen is that the regulatory overhead, I mean, in terms of
21:22 irregularities observed in KYC, for example, or irregularities or non-compliance observed in
21:28 other areas, are we certainly going to look at the platform more closely in that regard as well?
21:33 I mean, there's no doubting that very clearly. The second is from the reputation point of view,
21:39 see, I mean, I suppose when I really go and conduct a payments transaction, you know, after a while,
21:46 does it matter whether I conduct it on a phone pay kind of a platform or I conduct it on a UTI
21:52 platform? You know, there I do believe that the only factor that could work against the person
21:58 immediately, against the platform, sorry, immediately would of course be the reputation hit.
22:05 But I suppose if the platform continues to offer its services, if it continues to really comply
22:10 with the regulations, then it's a different story. Then they can bounce back, you know, after a while.
22:15 Non-compliance on the other hand is a serious issue. KYC is a serious issue. Even let's say
22:21 in a B2C environment, KYC is as critical because regulators not make any change in requirements
22:29 for a bank or for a B2C can take this thing. So, there once again, if there are non-compliances
22:35 observed, then I suppose the next thing that could perhaps follow is that that could be the
22:41 end of PayTM as well as a platform. The bank of course, from February 29th, certainly, that will
22:47 be a close down basically. So, yes, that is the next big risk. And when we keep saying non-compliance
22:52 in KYC, it's a big deal. Think of it this way. If you have a platform, which can allow you to
22:58 open accounts and not really check who you are, you're allowing a opening for fraudsters. I mean,
23:07 what do fraudsters use? Now, whether you did it on purpose or not, whether you looked the other way
23:13 because you wanted to shore up your numbers or whether you were lax, at the end of the day,
23:17 you will be held accountable. And that's perhaps the PayTM story that we're seeing play out. I have
23:23 run out of time. Mr. Parekh, thank you so much for joining us today. Amit, great to speak with
23:29 you on NDTV Profit. That's all the time we have on this big story, but we'll be tracking the PayTM
23:34 saga right here. Stay tuned.