In the aftermath of the Reserve Bank of India’s recent crackdown on Paytm’s Payments Bank, there’s a new development on the horizon. Government sources revealed on Sunday that the authorities are currently scrutinizing foreign direct investments from China in Paytm’s payment aggregator subsidiary.
Investigation
According to a report from PTI, the government is closely examining Chinese investments in Paytm Payments Services Ltd (PPSL). This subsidiary of One97 Communications Ltd, the parent company of Paytm, applied for a license with the RBI to function as a payment aggregator.
PPSL submitted its license application in November 2020 under the guidelines on the Regulation of Payment Aggregators and Payment Gateways. However, in November 2022, the RBI rejected the application, instructing the company to resubmit it to align with Press Note 3 under FDI rules.
In response, in December 2022, Paytm Payments Services Ltd filed an application with the government, detailing the downward investment from One97 Communications Ltd into the company to comply with Press Note 3 prescribed under FDI guidelines.
An inter-ministerial committee is currently delving into Chinese investments in PPSL. The decision on the FDI issue will be made after thorough consideration and a comprehensive examination.
Backdrop of FDI Rules
Press Note 3 mandates prior approval from the government for foreign investments in any sector from countries sharing a land border with India. This measure aims to prevent opportunistic takeovers of domestic firms, especially in the aftermath of the Covid-19 pandemic. The countries sharing a land border with India include China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan.
When approached by PTI, a Paytm spokesperson clarified that PPSL applied for an online Payment Aggregator (PA) application for online merchants. The regulator subsequently requested PPSL to seek necessary approvals for past downward investment and resubmit the application. The spokesperson emphasized that this is a regular process for obtaining a payment aggregator license with FDI approval.
During the pending process, PPSL was allowed to continue its online payment aggregation business for existing partners without onboarding new merchants. The spokesperson highlighted changes in ownership structure, with the Paytm founder remaining the largest stakeholder and Ant Financial reducing its stake in OCL to less than 10% in July 2023.
RBI’s Recent Actions
In a setback for Paytm, RBI recently barred Paytm Payments Bank Ltd (PPBL) from accepting deposits or top-ups in any customer account, prepaid instruments, wallets, and FASTags after February 29, 2024. This action followed a comprehensive system audit report and compliance validation report of external auditors, revealing persistent non-compliances and material supervisory concerns in PPBL.
On March 11, 2022, RBI had already prohibited PPBL from onboarding new customers with immediate effect.
