The meltdown at One97 Communications (Paytm) following the Reserve Bank of India's (RBI) diktat to halt the business operations of its payment bank raises more questions than answers on the role of the bank's board and the influence that Vijay Shekhar Sharma had over the bank's affairs.

The ownership of the bank, with an authorised capital of ₹400 crore, is quite convoluted given that Sharma owns a 51% stake in his personal capacity and the remainder stake is held by One97 Communication, thus making it an associate. As of March 2023, One97 had 29 subsidiaries, 10 associates and 3 joint ventures in India and abroad.

The central bank had in August 2015 given permission to Vijay Shekhar Sharma, one of the 11 applicants, under Section 22 (1) of the Banking Regulation Act, 1949, to set up the payments bank and not One 97 Communications. The only other individual to get an in-principle approval was Dilip Shanghvi, founder and MD of Sun Pharmaceuticals. Shanghvi, who had tied up with Telenor Financial Services and IDFC Bank to pursue the venture, however, scrapped the plan in 2016.

Whether the central bank was comfortable with the ownership of Paytm Payments Bank (PPBL) is unclear even as the bank formally commenced operations in May 2017.

Officially, Sharma is the CMD and CEO of One 97 Communications and since he owns a stake in the bank in his personal capacity, he is, technically, not in charge of the affairs as his designation is that of a part-time chairman. In other words, Surinder Chawla, who is the MD & CEO, is the face of the bank and not Sharma.

As per Section 10B(1A)(ii) and 35B of the Banking Regulation Act, 1949, if a chairman is appointed on a part-time basis, the management of the whole of the affairs of such banking company shall be entrusted to a managing director who shall exercise his powers subject to the superintendence, control and direction of the board of directors.

It's unclear what corporate governance norms were being adhered to by One97 and the board of the bank. What arm's length distance was kept considering that Sharma is the face of One97 but talks on behalf of the bank even though he is just a part-time chairman? As of March 2023, besides Sharma and Chawla, the board had five independent directors and two non-independent non-executive directors Bhavesh Gupta, CEO - lending and offline payments, Paytm, and Madhur Deora, president and group CFO, Paytm. Non-independent non-executive directors are neither independent nor are they responsible for the daily operations of the company. So, then who was running the show?

When the RBI first flagged off concerns in March 2022 and barred PPBL from onboarding new customers owing to 'material supervisory concerns', the-then MD & CEO, Satish Kumar Gupta, resigned from his post in October.

In January 2023, RBI cleared the appointment of Chawla for a three-year tenure. Chawla had moved to PPBL from RBL Bank, where he was the head–of branch banking. Prior to joining RBL in 2013, Chawla spent close to 12 years in senior management positions at HDFC Bank, culminating in his last role as head of the retail liabilities product group.

But since taking over the top job, Chawla was not present in any of the post-earnings calls that One97 held with analysts. The only regulars were Sharma, Gupta, Madhur Deora, president and group CFO, and Anuj Mittal, senior vice-president, investor relations, One97. The one constant comment thought at the beginning of all the analyst calls was: "This call is not meant for the media. If any media representatives are on this call, we request you to kindly drop off at this point." Even in the recent call that One97 held with analysts, Chawla was nowhere to be heard.

The irony of it all is that a release on Paytm's blog following the RBI diktat states "We would take this opportunity to clarify that as per banking regulations, the bank is run independently by its management and board. While we are allowed to have two board seats on the board of the bank, as a part of their shareholder agreement, we exert no influence on the operations of the bank, other than as a minority board member, and minority shareholder."

If indeed that was the case, who was supposed to be talking on behalf of the bank -- Sharma or Chawla?

Interestingly, One97's annual report states that "related party transactions with PPBL, being operational and critical in nature, play a significant role in company’s/its subsidiaries business(es)," but then also goes on to state: "related party transactions with PPBL, doesn't have a potential conflict of interest between the company and its directors or management or their relatives." How is that even possible given Sharma’s 51% stake in the bank!

It's not clear what will be the RBI’s next step of action against the bank. Will it supersede the board, though a Bloomberg report mentions that the regulator could scrap the bank's licence after the February 29 deadline.

As per the annual report, the bank caters to over 350 million individuals and merchants across the country and has over ₹3,285 crore across current and savings accounts. Among other services, the bank offers wallet, savings and current accounts to its customers, and also fixed deposits through a partner bank, IndusInd Bank. The bank has the largest share in wallet payments at 67% of value in monthly transactions and 44% in terms of number of transactions.

What is surprising though is that at a time when Aadhaar-enabled KYC is becoming par for the course, as of March 2023, of the 350 million wallets, only 106 million were KYC-compliant, holding ₹2,102 crore in deposits. Does that mean that of the total deposits, ₹1,183 of deposits were non-KYC compliant? The central bank had in 2021 detected serious KYC Anti Money Laundering violations and wanted the bank to fix the deficiencies. An unusually high number of dormant accounts are prone to have been used as mule accounts as some reports suggest that over 1,000 users were found to have linked the same Permanent Account Number to their accounts.

The bank claims to have responded to the RBI in December 2022, stating how it is addressing the observations made by the central bank. But it wasn’t enough as the RBI recommended further remedial action and compliance steps to be taken by the bank by March 31, 2023. The bank claims it has completed the recommended actions, including remedial measures, and submitted the progress to the RBI for validation. "As a result, the bank has demonstrated its commitment to regulatory compliance and strengthening its systems and processes," states the annual report.

But the latest clampdown clearly shows that RBI has found persistent non-compliance, warranting further supervisory action.

In the recent analyst call, One97 disclosed that of the 400,000 merchant loans issued, around 60,000 merchants have availed loans through Paytm's platform, with repayments processed through their Paytm Bank accounts. These merchants received their daily customer settlements in their Paytm Bank accounts and now need to transition the same to a different bank. Similar will be the case for the savings and current account deposit holders.

The bank is now faced with the challenge of transferring these users to alternative banks as the transition would require fresh KYC from the onboarding new bank as no banking entity would like to incur the pain of compliance issues cropping up later from the RBI. Given that the size of the deposit is not substantial, only a small finance bank or a comparatively smaller private bank would be interested in making the most of the low-cost funds.

The recent RBI diktat has now reduced Paytm to being just another UPI app where it is a distant third behind Google Pay and PhonePe, who dominate the UPI market.

In FY23, the total income of the bank was ₹2,678 crore, while its profit after tax (PAT) was ₹14.54 crore. As per the management of One97, a worst-case scenario would result in ₹300 to 500 crore hit on its annual EBITDA going forward, but it's the collateral damage on the intangible – trust – that will cost the company the most.

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