Rajeev Chandrasekhar, File.
| Photo Credit: Handout E Mail

The Reserve Bank’s regulatory action on Paytm Payments Bank has drawn the attention of fintech firms to the importance of complying with laws, Union Minister Rajeev Chandrasekhar has said.

The Minister stressed that regulatory compliance cannot be “optional” for companies, rather it is an aspect every entrepreneur must pay full attention to.

In an interview to PTI, Mr. Chandrasekhar — the Minister of State for Electronics and IT — said the issue of Paytm Payments Bank is a case where a hard-charging and aggressive entrepreneur has failed to realise the need for regulatory compliance, and that no company can get away if it is non-compliant with law.

Also Read | Enforcement Directorate questions Paytm executives; gets documents on latest RBI action

Any company, be it from India or abroad, big or small, has to abide by the law of the land, the Minister asserted amid the unfolding Paytm Payments Bank Ltd (PPBL) crisis.

The Reserve Bank of India (RBI) has barred PPBL from accepting new deposits from March 15, and ruled out any review of its action against the company.

Mr. Chandrasekhar said the notion that RBI action on PPBL had rattled fintechs, was not a correct characterisation. The politician, entrepreneur and technocrat disagreed that the Paytm Payments Bank issue had raised worries about detrimental consequences for the entire fintech industry.

“And this notion that RBI… the regulator’s action against Paytm Payments Bank has rattled fintech is… I don’t think that’s a correct characterisation.”

“I think it has drawn the attention of fintech entrepreneurs, to the fact that you also have to know how to comply with the law. Regulatory compliance is not an optional thing for any country in the world, certainly not in India, and it is something that they (entrepreneurs) should pay more attention to,” he said.

Mr. Chandrasekhar further said that entrepreneurs typically tend to get so sharply focused on what they’re building, that at times, they may lose sight of rules that have been laid down by regulators.

PPBL is an associate of One97 Communications Limited.

One97 Communications holds 49% of the paid-up share capital (directly and through its subsidiary) of PPBL. Paytm Founder and CEO Vijay Shekhar Sharma has a 51% stake in the bank.

RBI has advised customers and merchants of PPBL to shift their accounts to other banks by March 15, giving 15 more days to the embattled company to close most of its operations, including deposit and credit transactions.

RBI has cited persistent non-compliances and continued material supervisory concerns, for the regulatory action.

RBI in the list of FAQs (frequently asked questions), issued on Friday, clarified that Paytm QR code, Paytm Soundbox or Paytm POS terminal will continue to work after March 15, if it is linked to other banks instead of PPBL.

Fintech firm One97 Communications — owner of the brand Paytm — meanwhile said it has shifted its nodal account to Axis Bank from Paytm Payments Bank — a move that will allow continuity of Paytm QR, Soundbox, card machine after the March 15, deadline set by the central bank. The nodal account of Paytm is like a master account in which all its customers, merchant transactions are settled.

Mr. Chandrasekhar said he himself was a startup once and an entrepreneur once.

He said entrepreneurs and startups have a ‘genetic flaw’ that they get focused on what they’re building and sometimes forget to understand there are some rules that have been laid down by the regulators.

“So I will put this down to that type of an error where a hard-charging entrepreneur, believes in himself, is building a company successfully (but) fails to realise that there are some regulatory do’s and don’ts and there can never be a situation whether it’s a social media company, or a fintech company, where somebody is not compliant with the law and expects to get away with it,” the Minister said.

Also Read | ED finds no FEMA violation in Paytm Payments Bank case

An engineer by qualification, Mr. Chandrasekhar has worked in a team at PC chip maker Intel that developed pentium processors. In 1994 he started his journey as entrepreneur with his telecom services company BPL Mobile and exited from the company in 2005. Thereafter he set-up his investment and financial services firm Jupiter Capital.

“I have said all along and this is a position of the government of India, regardless of where you come into the digital economy from India or abroad, whether you have a big or a small firm in the digital economy, FinTech or AI, the rules in the law of the land has to be complied with.”

“In the FinTech space, the regulator who lays down the rules is the RBI. So, you have to listen to the RBI and you have to comply with the RBI,” the Minister said.

According to sources, as there is no PMLA scheduled offences involved in the case of PPBL, money laundering investigation cannot be done. File.
| Photo Credit: Reuters

The Enforcement Directorate (ED) has not found any violation under the Foreign Exchange Management Act (FEMA) during the inquiry of Paytm Payments Bank Limited (PPBL) transactions. The Reserve Bank of India (RBI) has the authority to take action against certain other instances of alleged non-compliance, according to the sources privy to the matter.

On January 31, the RBI had issued a circular barring PPBL from taking further deposits, top-ups or undertaking credit transactions into its customer accounts, wallets, FASTags, and National Common Mobility Cards (NCMC) after February 29. The deadline has now been extended till March 15. 

Also read: Paytm Payments Bank meltdown, its meaning | Explained

The action was taken on the basis of the Comprehensive System Audit report and a subsequent compliance validation report of the external auditors’ reports disclosing “persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action”.

The ED was also asked to scrutinise the financial transactions under the scanner. The agency investigates suspected violations or offences under the FEMA and the Prevention of Money Laundering Act (PMLA).

According to sources, as there is no PMLA scheduled offences involved in the case of PPBL, money laundering investigation cannot be done. “If no crime is made out, there is also no generation of ‘proceeds of crime’ and so, PMLA does not apply,” said a government official. Therefore, the ED looked into the transactions to determine if there was any violation under the FEMA provisions.

KYC compliance

It is learnt that the ED examined more than 50 lakh wallets/accounts, largely having small deposits, which did not reveal any foreign exchange rule contravention. The other alleged violations mainly pertained to Know Your Customer (KYC) compliance and other issues, on which the RBI is empowered to take action. The ED findings have been reported to the RBI with certain observations as regards some other payment banks, apart from PPBL, third party application providers, and payment aggregators as well, a source said. The RBI may take appropriate action in this regard.

The areas of concern flagged by the agency include slackness in adherence to KYC norms such as the processes involving user or merchant onboarding, document collection and authentication, anti-money laundering measures, merchant category code assignment, and National Payments Corporation of India’s regulatory compliance.

Among the other aspects are processes for identification of ultimate beneficial ownership, politically exposed persons, KYC adherence related to setting up of virtual accounts, strict monitoring and periodic reporting of suspect transactions to the authorised agencies such as the Financial Intelligence Unit.

Given that vulnerabilities like possible misuse of Application Programming Interfaces (API) keys and URL spoofing may lead to financial fraud, full-fledged adoption of Information Technology audit framework as prescribed by the agencies concerned has also been recommended.

Son of a schoolteacher from Aligarh district in Uttar Pradesh, Vijay Shekhar Sharma was enamoured by Jack Ma-run Alibaba’s focus on smartphones rather than desktop computers, when he built a digital payments company that would let Indians pay for vegetables, pay utility bills or buy cinema tickets using their mobile phones.

Mr. Sharma, the poster boy of India’s fintech boom, also set out to build an Alipay-like mobile marketplace to go alongside the payments business, allowing businesses to sell goods from matchbox to iPhones online.

With fame came a set of controversies for arguably the most high-profile of a wave of Indian tech entrepreneurs. But none like the one now. The current crisis where the Reserve Bank of India (RBI) has ordered Paytm Payments Bank to halt most of its business, is an existential one.

Here is a breakdown of Paytm Payments Bank crisis

What was the recent RBI action against Paytm Payments bank all about?

The RBI last week ordered Paytm Payments Bank Ltd, a restricted bank that can take deposits but cannot lend, to not take any further deposits or conduct credit transactions or carry out top-ups on any customers accounts, prepaid instruments, wallets, cards for paying road tolls after February 29.

Paytm Wallet customers can use money till the time their balance is exhausted. They cannot add money after February 29. And in case the RBI does not relent, top-up for Paytm Wallet will stop and transactions through it would no longer can be carried.

What is Paytm Payments Bank, and who owns it?

Paytm Payments Bank Limited (PPBL) is an associate of One97 Communications Limited (OCL). One97 Communications holds 49% of the paid-up share capital (directly and through its subsidiary) of PPBL. Mr. Sharma has a 51% stake in the bank.

PPBL commenced operations as a payments bank with effect from May 23, 2017. The bank offered digital banking, including savings accounts, current accounts, fixed deposits with partner banks, and balance in wallets, UPI, and FASTag, among other services.

Paytm Wallet, which comes under PPBL, leads the segment. As per the RBI’s provisional data for December 2023, Paytm Wallet users carried out 24.72 crore transactions worth over ₹8,000 crore for purchase of goods and services while 2.07 crore transactions were carried out for transferring over ₹5,900 crore.

What happened and what it means for customers?

The RBI directed the Paytm Payments Bank to stop accepting deposits or top-ups in customer accounts, wallets, FASTags and other instruments after February 29 on January 31. Withdrawal or utilisation of balances by its customers from their accounts, including savings bank accounts, current accounts, prepaid instruments, FASTags, National Common Mobility Cards, are to be permitted without any restrictions, up to their available balance.

Paytm Wallet users can continue to carry on transactions till February 29. However, after February 29, they will be able to use their existing balance till the time it is exhausted but not add any money to their account.

The same rule is applicable on PPBL accounts, Paytm Wallet-linked services like FASTag, National Common Mobility Card that are used for travel in metro and other public transport.

What are the alternatives for users?

There are over 20 banks and non-banking entities that offer wallet service like Mobikwik, PhonePe, SBI, ICICI Bank, HDFC, Amazon Pay etc.

Similarly, there are 37 banks comprising all the known public and private sector banks like SBI, HDFC, ICICI, IDFC, Airtel Payments Bank which are authorised to provide FASTag. Customers can recharge FASTag online using their banks mobile banking, internet banking or third party apps like Google Pay, PhonePe etc.

Why did Paytm Payments Bank come under RBI lens?

The banking regulator had been frequently flagging off issues. According to sources, money laundering concerns and questionable dealings of hundreds of crores of rupees between popular wallet Paytm and its lesser-known banking arm had led RBI to clamp down on entities run by Mr. Sharma.

Sources further said that PPBL had lakhs of non-KYC (Know Your Customer) compliant accounts and in thousands of cases single PANs were used for opening multiple accounts. There were instances of the total value of transactions — running into crores, much beyond regulatory limits in minimum KYC pre-paid instruments raising money laundering concerns, sources said.

What has been the company’s response to the RBI’s Jan 31 action?

While users have the option to switch to other wallets, and FASTag services etc being provided by other vendors, Paytm management has said that PPBL is in discussion with the RBI to comply with their direction for continuing the business.

Paytm has said that its financial services such as loan distribution, insurance distribution and equity broking are not in any way related to PPBL and are expected to be unaffected. The company’s offline merchant payment network offerings like Paytm QR, Paytm Soundbox, Paytm Card Machine will continue as usual, where it can onboard new offline merchants as well.

Paytm sees an impact of ₹300-500 crore on its annual operational profit.

How has One97 Communications’ shares responded?

Following the RBI’s crackdown, shares of One97 Communications Ltd, which owns Paytm brand, slumped 40% in the last two days. The stock tanked 20% to ₹487.05, its lowest trading permissible limit for the day, on the BSE on Feb. 2. In two days, the company’s market capitalisation eroded by ₹17,378.41 crore ₹Rs 30,931.59 crore.

Paytm app is seen on a smartphone in this illustration image. File
| Photo Credit: Reuters

Traders’ body CAIT on February 4 issued a cautionary advisory to traders to switch from Paytm to other payment options for business-related transactions following RBI curbs on Paytm wallet and bank operations.

“The Reserve Bank of India has imposed certain restrictions, prompting CAIT to recommend that users take proactive measures to protect their funds and ensure uninterrupted financial transactions. Large number of small traders, vendors, hawkers and women are making payments through Paytm and as such RBI restrictions on Paytm could lead financial disruption to these people,” the Confederation of All India Traders (CAIT) stated.

Money laundering concerns and questionable dealings of hundreds of crores of rupees between popular wallet Paytm and its lesser-known banking arm had led Reserve Bank of India to clamp down on tech poster boy Vijay Shekhar Sharma-run entities, according to sources.

The central bank has ordered Paytm Payments Bank Ltd (PPBL) to halt most of its business including taking further deposits, conducting credit transactions and carrying out top-ups on any customer accounts, prepaid instruments, wallets, and cards for paying road tolls after February 29.

This means customers can access their existing deposits and pay for services with money stored in their wallets till February 29. And in case, RBI does not relent, top-up for Paytm wallet will stop and transactions through it would no longer can be carried.

CAIT Secretary General Praveen Khandelwal said that the recent restrictions imposed by RBI on Paytm have raised concerns about the security and continuity of financial services provided by the platform.

He emphasised the urgency of this advisory, urging traders to act promptly and make informed decisions to mitigate any potential adverse effects on their financial operations.