The Financial Intelligence Unit-India has slapped a ₹5.49 crore penalty on Paytm Payments Bank Limited (PPBL) for violations of the Prevention of Money Laundering Act (PMLA).
| Photo Credit: GIRI KVS

The Financial Intelligence Unit-India under the Union Finance Ministry has slapped a ₹5.49 crore penalty on Paytm Payments Bank Limited (PPBL) for violations of the Prevention of Money Laundering Act (PMLA), after finding substantial proof of money generated from illegal activity being routed through accounts held by some entities with the bank. 

The FIU-IND had initiated a review of the PPBL’s operations after receiving “specific information” from law enforcement agencies about a few entities and their network of businesses engaging in “a number of illegal acts, including organising and facilitating online gambling”, the agency said in a statement on Friday about the penalty order issued on March 1, 2024.

The Paytm Payments Bank debacle | Explained

“Further, the money generated from these illegal operations, i.e. proceeds of crime were routed and channelled through bank accounts maintained by these entities with the Paytm Payments Bank Ltd,” it said.

Documents pertaining to such activity were scrutinised and a Show Cause Notice was served on the bank for violating multiple regulations laid down in the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. These included breaches of the rules pertaining to safeguards to be adopted for Anti-Money Laundering, Counter-Terrorism Financing and Know Your Customer or KYC processes for beneficiary accounts and payout services.

“After considering the written and oral submissions of the Paytm Payments Bank Ltd, Director, FIU-IND, based on the voluminous material available on record, found that the charges against Paytm were substantiated,” the agency said, adding that a monetary penalty of ₹5.49 crore was imposed in an order passed under Section 13 of the PMLA.

Paytm Payments Bank meltdown, its meaning | Explained

A PPBL spokesperson said, “The penalty pertains to issues within a business segment that was discontinued two years ago. Following that period, we have enhanced our monitoring systems and reporting mechanisms to the Financial Intelligence Unit (FIU).”

The FIU is India’s national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions to enforcement agencies and its foreign counterparts.

New Delhi:

Paytm CEO Vijay Shekhar Sharma on Monday resigned as non-executive chairman and board member of Paytm Payments Bank, amid ongoing regulatory challenges faced by the digital payments giant. The decision follows a series of measures imposed by the Reserve Bank of India (RBI), including an order for Paytm Payments Bank to wind down operations by March 15 due to persistent compliance issues and supervisory concerns.

The RBI’s action against the payments bank stemmed from various concerns, including inadequate customer identity checks and a perceived lack of arms-length distance from the parent company, Paytm. These issues prompted a major board overhaul, with former chairman of Central Bank of India, Srinivasan Sridhar, former Bank of Baroda Executive Director Ashok Kumar Garg, and two retired Indian Administrative Service (IAS) officers joining the payments bank’s board.

Paytm’s decision to reconstruct the board with independent and executive directors is seen as an effort to demonstrate compliance with regulatory norms and salvage the situation. While the RBI did not explicitly mandate the board reconstruction, it is speculated that the move aims to reassure the regulatory body about Paytm’s commitment to adhering to norms.

Why Vijay Shekhar Sharma Quit

Mr Sharma owns a 51 per cent stake in Paytm Payments Bank while One 97 Communications, as Paytm was formally known, owns the rest. Mr Sharma said that his resignation from the board and the appointment of independent directors were strategic steps to enable a smooth transition and enhance governance structures. The move is also seen as an attempt to disassociate Paytm from its payments bank unit and position it as an independent entity.

The regulatory challenges faced by Paytm have impacted its stock value, with a significant drop since the RBI’s order. However, the stock has shown signs of recovery, attributed to Paytm’s partnership with new banking entities and the RBI extending the deadline for winding down the payment bank’s operations.

Nirmala Sitharaman’s Action

Finance Minister Nirmala Sitharaman on Monday convened a meeting with representatives from the fintech industry to discuss their concerns and issues. However, the developments at Paytm Payments Bank were not specifically addressed during this meeting, according to two government officials who were present, reports Reuters.

In response to the crisis, the finance ministry has announced plans to hold discussions with Indian law enforcement agencies and fintech firms in the near future. This upcoming meeting aims to facilitate communication between fintech firms and various enforcement agencies, as mentioned in a statement released by the ministry.

The concerns raised by some listed fintech companies regarding their ownership structures will be examined by both the central bank and the government. This move signals a broader effort to enhance transparency and accountability in the fintech sector.

Additionally, the government has pledged to simplify ‘know your customer’ (KYC) norms across the fintech space. Simplifying KYC requirements could streamline onboarding processes for users, potentially addressing some of the operational challenges faced by fintech firms.
 

Union Finance Minister Nirmala Sitharaman during an interaction with Start-Up and Fintech Entities, in New Delhi, on February 26, 2024.
| Photo Credit: PTI

Finance Minister Nirmala Sitharaman nudged India’s financial sector regulators to hold monthly meetings with fintechs to address their concerns and mooted a day-long workshop with law enforcement agencies for such firms to raise any issues they may be facing.

Moreover, the Reserve Bank of India (RBI), and the Department for Promotion of Industry and Internal Trade (DPIIT) will work with the Ministry of Finance to examine issues relating to change of ownership holdings and control of listed fintech companies to enable them to be in sync with regulatory compliance requirements.

These were among the key action points that emerged after an interaction with India’s top fintech entities and the Payment Council of India chaired by the Minister on Monday, in the presence of top officials from the ministries of Finance, DPIIT and Electronics and IT, as well as the RBI.

Sources said that fintech entities and start-up founders appeared unfazed by the challenges facing the Paytm Payments Bank Limited and its parent entity. “No Paytm-related anxiety or concerns were shown by industry representatives at the meeting,” said an official aware of the deliberations.

While efforts to simplify and digitise Know Your Customer (KYC) norms across the fintech segments were mooted, the need to rationalise cost of funds for critical areas, including priority sector loans was also raised.  DPIIT Secretary Rajesh Kumar Singh informed that new patent examiners have been added to reduce the turn-around-time of patent applications. India has over 10,200 fintech entities.

“The Finance Minister noted the rapid growth of the Start-up and Fintech sector of India, especially in the last decade, and welcomed suggestions from the  FinTech leaders to achieve greater Ease of Doing Business and Ease of Living for consumers,” an official statement said, noting that issues relating to cybercrime will be suitably addressed in the new Digital India Act.

A file photo of M. Damodaran, former Chairman, Securities and Exchange Board of India (SEBI).
| Photo Credit: SOMASHEKARA GRN

An advisory committee, set up by Paytm owner One97 Communications after the Reserve Bank of India’s action on its payments bank business, is at a stage of engagement with the company on matters related to the terms of reference for the panel, the panel’s head and former SEBI chairman M. Damodaran said.

“We have been engaging with the group on matters relating to the Advisory Committee’s terms of reference,” Mr. Damodaran said on February 26 in response to a query about his engagement with Paytm. He said that the panel members are external advisors and presently Paytm is engaged in dealing with the RBI.

Mr. Damodaran is the head of Paytm’s group advisory committee which will advise the company on strengthening compliance and on regulatory matters. The committee was set up on February 9.

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

On January 31, the RBI asked PPBL (Paytm Payments Bank Ltd) to stop further deposits, credit transactions, or top-ups in any customer accounts, prepaid instruments, wallets, FASTags, and National Common Mobility Cards, after February 29. Later, the central bank extended the deadline till March 15.

Meanwhile, the Reserve Bankb on Feb, 23 asked the National Payments Corporation of India (NPCI) to examine the possibility of migrating Paytm Payments Bank customers using the UPI handle ‘@paytm’ to 4-5 other banks, in a bid to prevent any disruptions in the payment ecosystem.

Mr. Damodaran was speaking at the release of his biography ‘The Turmeric Latte’ compiled by one of his former colleagues. During a panel discussion at the event, when he was asked about his views on the current functioning of SEBI, he said the capital markets regulator has bandwidth problems with respect to the large amount of issues that it has to handle. “SEBI has a huge challenge. The bandwidth seems inadequate to tackle the large number of issues that they have to tackle. In the process, it sometimes feels like they are biting more than they can chew,” he 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.

A worker adjusts a hoarding of Paytm, a digital payments firm, in Ahmedabad, India.
| Photo Credit: AMIT DAVE

Amid reports that the Enforcement Directorate (ED) had on Wednesday filed cases against Paytm for alleged FEMA violations, One 97 Communications Ltd., the parent company of Paytm, neither confirmed nor denied the reports and told stock exchanges that the company, its subsidiaries and its associate, Paytm Payments Bank Limited, have over time been receiving notices from various authorities including the ED.

In a clarification to the exchanges, the company said that besides notices it has received requests for information, documents and explanations from the authorities, including ED, with respect to customers that may have done business with the respective entities. It added that it has provided the required information, documents and explanations to the authorities.

Also read: The Paytm Payments Bank debacle | Explained

“The Company and its associate have continued to provide such information, documents and explanations to the authorities as is being required by them,” it said in a filing with the exchanges.

“We would also like to clarify that our associate Paytm Payments Bank Limited does not undertake Outward Foreign Remittance. We have always made and will continue to make disclosures with our obligations under the SEBI Regulations, 2015,” it added.

The price of the company’s stock continued its fall in the exchanges. It fell 9.99% to ₹342.35 on the BSE.

Paytm. File.
| Photo Credit: REUTERS

Shares of Indian digital payments firm Paytm slumped 10% to a near record low on Monday, extending a rout from last week triggered by a regulatory crackdown on its banking unit.

Paytm has lost about $2.5 billion or about 43% of its market value since the Reserve Bank of India (RBI) told Paytm Payments Bank on Wednesday to stop accepting fresh deposits in its accounts or popular wallets from March.

The stock fell by its daily trading limit to ₹438.5 ($5.28) on Monday, just shy of the previous all-time low of ₹438.35 hit in November 2022.

RBI’s order, which has far-reaching consequences for how India’s most popular digital payments app Paytm operates, led to a 20% drop in the stock — its daily maximum at that time — on Thursday and Friday.

Paytm is in exploratory talks with HDFC Bank and Jio Financial Services to sell its wallets business, which is housed under Paytm Payments Bank, the Hindu Business Line newspaper reported on Monday.

Paytm, HDFC Bank and Jio Financial did not immediately respond to Reuters’ requests for comment.

Also read: Paytm app will continue to work beyond February 29 as usual: CEO Vijay Shekhar Sharma

The RBI has found hundreds of thousands of accounts at Paytm Payments Bank created without proper identification and has passed the information on to the country’s financial crime fighting agency, three sources familiar with the matter said.

The RBI is concerned that some of the accounts could have been used for money laundering, according to the sources.

India’s Revenue Secretary Sanjay Malhotra told Reuters on Saturday the financial crime fighting agency would probe Paytm Payments Bank if any fresh charges of fund siphoning are found.

Paytm denied money laundering allegations and said the company and Paytm Payments Bank have never been probed by the Enforcement Directorate.

India’s stock exchanges have cut Paytm’s daily trading limit to 10% from 20%, after the stock crashed on Thursday and Friday.

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.