The share price of One97 Communications, the parent company of Indian digital payments giant Paytm, has experienced a sharp decline, hitting the new lower circuit breaker on the Bombay Stock Exchange. The stock fell by 10%, reaching 438.50 rupees ($5.28), marking a new low after a 20% drop on both Thursday and Friday.
The Bombay Stock Exchange (BSE) responded to the persistent decline by adjusting the daily lower circuit breaker for Paytm shares from 20% to 10%. This decision followed regulatory actions taken by the Reserve Bank of India (RBI) against Paytm Payments Bank Limited (PPBL) on January 31, which led to consecutive 20% lower circuit limits.
The RBI’s directive ordered PPBL to cease accepting fresh deposits in its accounts or digital wallets from March. The central bank cited “persistent non-compliance and continued material supervisory concerns in the bank” as the reasons behind this regulatory move.
Investors and market intermediaries are expressing concerns about the potential negative impact of the RBI’s actions on Paytm’s business volumes and profitability. In just three trading sessions following the regulatory intervention, Paytm lost 205 billion rupees, representing a staggering 42.4% decrease in market capitalization.
Furthermore, there are reports of an ongoing investigation by the Enforcement Directorate (ED), India’s federal investigating agency for financial crimes, into Paytm and its CEO Vijay Shekhar Sharma for alleged money laundering. However, Paytm has vehemently denied any such investigation, stating in a stock exchange filing that neither the company nor its founder is being probed by the ED.
Implications and Future Outlook for Paytm
With One97 Communications holding a 49% stake in PPBL and classifying it as an associate rather than a subsidiary, the RBI’s directive will severely impact the company’s operations. PPBL is facing restrictions on most of its business activities, including accepting further deposits, conducting credit transactions, and top-ups on customer accounts, prepaid instruments, wallets, and cards for road toll payments after February 29, 2024.
Despite these challenges, Paytm’s management asserts that the company will continue to operate its wallet and payments business by establishing new banking relations. Paytm’s founder and chairman, Vijay Shekhar Sharma, with a 51% stake in PPBL, remains optimistic about the company’s ability to navigate through the disruptions.
In response to the RBI’s actions, Paytm president and chief operating officer Bhavesh Gupta acknowledged potential disruptions and an impact on the company’s lending business. However, he emphasized that efforts were underway to ensure a smooth transition for customers who had mandates from PPBL bank accounts to switch to other accounts.
Vijay Shekhar Sharma sought to reassure users and investors via a Twitter post, stating that the app is working and will continue to work past February 29 as well. He also mentioned that the company is sincerely committed to serving its customers.
Market Sentiments and Analyst Assessments
Despite management assurances, market sentiment remains uncertain. Jefferies, a stockbroker firm, downgraded Paytm’s shares to ‘underperform’ and lowered its target price to 500 rupees per share. The firm cited a lack of clarity on the RBI’s actions and anticipated negative impacts on the company’s growth and profitability.
Macquarie, while acknowledging the seriousness of the RBI ban, maintained a “neutral” rating on the company’s stock with a target price of 650 rupees. The managing director of Macquarie, Suresh Ganapathy, highlighted the significant challenges faced by PPBL, leading to potential revenue and profitability implications in the medium to long term.
Motilal Oswal, another Indian stockbroking company, adopted a “watchful stance” on Paytm’s business model and suggested a target of 575 rupees. Analysts predict that the ongoing crisis could impact Paytm’s market share in the digital payments landscape.
Challenges and Reflections on Paytm’s IPO
Paytm’s $2.5 billion initial public offering (IPO) on the Bombay Stock Exchange in November 2021 was initially viewed as a significant milestone, reflecting India’s appeal to global capital. However, the company faced a setback, losing over a quarter of its value on its trading debut. The unprofitable company’s market value has since fallen to approximately $3.5 billion, representing an 80% decline from its stock market listing.