Navigating Paytm’s Turmoil: Investigation Updates and Market Reactions

The investigation into potential foreign exchange violations at Paytm Payments Bank, conducted by India’s Enforcement Directorate, has thus far not unearthed any breaches, according to a government source familiar with the matter. Last week, the Enforcement Directorate initiated an inquiry into overseas transactions conducted by Paytm Payments Bank, a subsidiary of One97 Communications, widely recognized as Paytm.

The market reaction to this news has been significant, with Paytm shares plummeting by over 50% since the Reserve Bank of India’s announcement on January 31st. The directive from the Reserve Bank of India stated that Paytm Payments Bank could no longer accept new funds into its accounts or wallets. This decline has led to a substantial erosion of approximately $3.1 billion in shareholders’ wealth.

While the investigation has revealed some lapses related to know-your-customer (KYC) regulations, which are designed to verify user profiles, no violations of the Foreign Exchange Management Act (FEMA) by Paytm Payments Bank have been detected thus far, as per the government source. However, there have been issues reported regarding the failure to generate suspicious transaction reports by the bank. The Enforcement Directorate is still evaluating whether any charges will be brought forth for potential violations.

In response to these developments, Paytm reiterated a statement from last week, indicating its cooperation with the Enforcement Directorate and other relevant authorities. Following this news, shares of One97 Communications experienced a 5% surge for a second consecutive session, resulting in a total gain of over 10% in two days.

In a bid to navigate its current crisis, Paytm Payments Bank secured a 15-day extension for its wind-down process until March 15th, granted by the Reserve Bank of India. Additionally, on the same day, Paytm announced a new banking partnership with Axis Bank, aimed at maintaining some of its popular products amidst the ongoing turmoil.

Market analysts have responded to these developments with varying perspectives. Bernstein analysts view the deadline extension positively, as it allows for the smooth transfer of Paytm Payments Bank accounts. They also consider the continuation of Paytm’s services for merchants, such as QR codes and card machines, as a significant advantage. Citi analysts anticipate further banking partnerships like the one with Axis Bank, which they regard as beneficial for Paytm’s business continuity.

However, despite these positive aspects, Citi has maintained its “sell” rating on Paytm’s stock. Jefferies, on the other hand, has decided to suspend coverage of Paytm until there is more clarity on regulatory actions. Notably, two other brokerages have ceased coverage in the past month.

Presently, 13 analysts cover Paytm, with five recommending selling the stock, marking a notable shift from the past year. Despite this, the overall average rating remains equivalent to “hold,” according to data from LSEG. Moreover, the median price target for the stock has decreased by 31% in the past month, reflecting the market’s uncertainty. As of now, Paytm’s stock is trading at 358.35 rupees, below the revised price target.