Paytm, India’s leading digital payments platform, is facing scrutiny from the government over its foreign direct investment (FDI) from China. According to sources, the government is examining the FDI from China in Paytm Payments Services Ltd (PPSL), the payment aggregator subsidiary of One97 Communications Ltd (OCL), which owns Paytm .
Paytm and Press Note 3
The issue arose when PPSL applied for a licence with the Reserve Bank of India (RBI) to operate as a payment aggregator under the guidelines on Regulation of Payment Aggregators and Payment Gateways in November 2020. However, in November 2022, RBI rejected PPSL’s application and asked the company to resubmit it, so as to comply with Press Note 3 under FDI rules .
Press Note 3, issued by the government in April 2020, made its prior approval mandatory for foreign investments in any sector from countries that share land border with India to curb opportunistic takeovers of domestic firms following the COVID-19 pandemic. Countries which share land borders with India are China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar and Afghanistan .
OCL has investment from Chinese firm Ant Group Co., which is an affiliate of Alibaba Group Holding Ltd. Ant Group Co. holds a 30.33% stake in OCL as of March 2020. Subsequently, PPSL filed the required application on December 14, 2022 with the Government of India for past downward investment from OCL into PPSL in order to comply with Press Note 3 prescribed under FDI guidelines .
Current Status: Paytm and Inter-Ministerial Committee
An inter-ministerial committee is examining the investments from China in PPSL and a decision would be taken on the FDI issue after due consideration and comprehensive examination, sources said .
The spokesperson of Paytm said that PPSL followed the relevant guidelines and submitted all relevant documents to the regulator within the stipulated time. The spokesperson also said that during the pending process, PPSL was allowed to continue with its online payment aggregation business for existing partners without onboarding any new merchants .
The spokesperson further said that since then the ownership structure has changed. The Paytm founder remains the largest stakeholder in the company. Ant Financial reduced its stake in OCL to less than 10% in July 2023. Subsequently, it does not qualify for beneficial company ownership. OCL founding promoter now holds a 24.3% stake. Therefore, your understanding of FDI from China in PPSL is incorrect and misleading.
Challenges and Opportunities
This is not the first time that Paytm has faced regulatory hurdles from RBI. In March 2022, RBI had barred Paytm Payments Bank Ltd (PPBL), an associate company of OCL, from onboarding new customers with immediate effect. In February 2024, RBI further barred PPBL from accepting deposits or top-ups in any customer account, prepaid instruments, wallets, and FASTags, among others after February 29, 2024 .
RBI had said that these actions against PPBL followed a comprehensive system audit report and subsequent compliance validation report of external auditors. These reports revealed persistent non-compliances and continued material supervisory concerns in PPBL, warranting further supervisory action .
Paytm is one of the most valued startups in India with a valuation of over $16 billion as of December 2020. It has over 450 million registered users and offers services such as mobile recharges, bill payments, e-commerce, insurance, mutual funds, gaming and more. The company is also planning to launch its initial public offering (IPO) later this year.
However, the ongoing probe into its FDI from China and the regulatory actions by RBI may pose challenges for its growth and expansion plans. The company may also face competition from other players in the digital payments space such as PhonePe, Google Pay, Amazon Pay and WhatsApp Pay.
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