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Vijay Shekhar Sharma-led fintech decacorn Paytm’s parent company One97 Communications has filed its draft red herring prospectus (DRHP) for an initial public offering (IPO) to raise INR 16,600 Cr.

Founded by Vijay Shekhar Sharma in 2000, it began its journey as a value added service provider, and evolved over the years with different fintech solutions to become an online mobile payments firm.

One97 Communications operates Paytm Payments Bank Limited, Paytm General Insurance Limited, Paytm Life Insurance Limited, Paytm Money Limited, Paytm E-Commerce Private Limited, Paytm Entertainment Limited among other smaller entities. These combine to give Paytm a strong acquisition channel for its core business of payments and fintech services.

Here are the key risk factors to its business as identified in its DRHP:

Merchant And Consumer Ecosystem

Paytm’s business is heavily dependent on its merchant ecosystem with merchant fees across  payments, commerce, cloud and fintech services contributing heavily to its revenue. Its total merchant base has grown from 11.2 Mn as of FY19 to 21.1 Mn as of FY21, and its gross merchandise value (GMV) has increased from INR 2,292 Bn in FY19 to INR 4,033 Bn in FY 2021.

Merchant contracts range between six months and five years and the terms of such contracts allow these merchants to terminate the contracts without cause. 

So loss of merchant base, impact to merchant business and/or large sections of the merchant business could put Paytm’s business at risk.

A similar risk exists with its customer base where failure to attract new customers, loss of existing customer base or business from the customers can impact Paytm’s business performance. Paytm has been reducing its marketing spends and incentives for customers but according to recent reports, the company is going to ramp up this expenditure again. The company has also ramped up its rewards and incentives with a INR 50 Cr allocation for merchants and users on the platform in the run up to its own IPO. 

The company reported a monthly transacting user base of 50.4 Mn in the last quarter of FY21.

Dependence on Payment Services

Transaction fees from merchant payment services account for 75% of Paytm’s revenue from operations. 

“Our failure to broaden the scope of payments services that are attractive may inhibit the growth of our business, as well as increase the vulnerability of our core payments business to competitors. Further, our revenue may also be affected by our service mix. We generate higher fees from the use of certain payment instruments compared to others,” noted Paytm.

Currently payment operators cannot charge merchant discount fees (MDR) on UPI and RuPay debit transactions. UPI is increasingly displacing other forms of digital payments in the ecosystem. Further changes to MDR as well as payment channel preferences can impact the business.

Economic Effect of Covid-19 Pandemic

As stated by fintech company Mobikwik in its DRHP as well, the pandemic and resultant lockdowns have caused huge losses to the fintech payments ecosystem, especially those dependent on merchant storefront payments. Paytm noted that revenue from its commerce and cloud services decreased by 38.0% to INR 6,932 Mn in FY 2021 from INR 11,188 Mn in FY 2020. Its commerce GMV declined in FY 2021 primarily due to disruptions to partners in travel, entertainment and ecommerce industries.

Technology Infrastructure

Any errors and vulnerabilities discovered in the payment platform’s code or from third-party software could result in negative publicity, a loss of consumer base and/or revenue. Such vulnerabilities could also be exploited by malicious actors and result in exposure of data of the participants and security breaches. 

The company particularly highlighted the service disruptions during peak usage periods like shopping festivals and proportional events when payment operators experience significantly higher transaction volumes. This is an issue where banks have been facing increasing scrutiny from the Reserve Bank Of India (India) and increasingly UPI operators are also facing the heat.

Paytm Payments Bank

A bulk of the payment instruments or channels on the Paytm platform, such as Paytm Wallet, Paytm UPI, NACH, Paytm FASTag and Fixed Deposits are offered by Paytm Payments Bank. Vijay Shekhar Sharma owns 51% equity stake in the payments bank and One97 Communications holds the rest. If Paytm Payments Bank fails to comply with laws, regulations or policies, or loses its licenses, and as a result is unable to provide services then the Paytm suite of fintech solutions are likely to suffer an impact.

Profitability

Paytm has incurred net losses for the last three years to the tune of INR (42,355) Mn, INR (29,433) Mn and INR (17,040) Mn in FY19, FY20 and FY21, respectively.  Interestingly, for a company hoping to attract future investors, Paytm has no signs of profitability in the horizon.

“We expect to continue to incur net losses for the foreseeable future and we may not achieve or maintain profitability in the future… We cannot assure you that we will ever achieve or sustain profitability and may continue to incur significant losses going forward. Any failure by us to achieve or sustain profitability on a consistent basis could cause the value of our Equity Shares to decline,” noted the company. 

Competition

Paytm competes with a diverse range of businesses due to its large portfolio. From payments banks, payment system operators, UPI apps and wealth management platforms, the company goes up against  the likes of Airtel, Reliance Jio, WhatsApp, MobiKwik, BillDesk, Google, PhonePe and many others. 

“We compete with domestic and international companies and some of these companies have greater financial resources and substantially larger bases of consumers than we do, which may provide them with significant competitive advantages. We may also face pricing pressures from competitors. Some potential competitors are able to offer lower prices to merchants for similar products and services by cross-subsidizing their payments services through other services they offer,” it noted.

It specifically noted that some of its competitors may get “licences” that may hinder Paytm’s ability to offer certain services. Paytm has teamed up with Ola and Insurance Platform PolicyBazaar, along with Mumbai-based Electronic Payment and Services had set-up an entity called Foster Payment Network to apply for a new umbrella entity (NUE) license. NUEs are believed to bring further innovation in the digital and retail payments sector to complement NPCI and reduce risks of overload on the Unified Payments Interface (UPI) infrastructure.

Mobile Operating System And Marketplace

Over the past year Paytm has had altercations with Google’s mobile operating system platform marketplace- Playstore, over certain offerings within the Paytm portfolio which resulted in Paytm being briefly dropped from the marketplace. It has specifically stated that any unavailability or lack or visibility on such discovery platforms will impact its business.

“We rely on mobile operating systems and application marketplaces to make the Paytm app available to participants that utilize our platforms, and if we do not effectively operate with or receive favourable placements within such application marketplaces and maintain high consumer reviews, our usage or brand recognition could decline and our business, financial results, cash flows and results of operations could be adversely affected,” stated the company.

Policy Risks

Recently, the RBI has issued the Guidelines on Regulation of Payment Aggregators and Payment Gateways, 2020 requiring existing providers of payment aggregator and gateway services to apply for an authorization from the RBI by December 31, 2021. These guidelines also stipulate that a single entity cannot provide an ecommerce marketplace (as in case of Paytm Mall) along with payment aggregator services. To comply with the requirements Paytm has applied for authorisation of its payment subsidiary earlier in the year and it plans to transfer its payment aggregator service to the subsidiary subject to RBI approval.

The company also stated that while NPCI’s 30% transaction caps do not apply to its platform at present, any updates in the requirements can impact business. Further, the amendment of SEBI’s (Investment Advisors) Regulations, 2013 in March 2021, requires client level segregation of advisory and execution activities of an investment advisor. Due to this Paytm Money’s registered investor advisory services have been suspended although SEBI has submitted a plan for migration of Paytm’s advisory clients to the execution services. 

Paytm has also flagged risks to its real money gaming services- Paytm First Games- which is subject to a number of disputed policy issues. “The state legislations in relation to gambling and other applicable laws along with the judicial pronouncements by the respective high courts in this regard are evolving and accordingly there continues to be uncertainty in the regulatory framework applicable to certain states and differing approaches from one state to the other, which could adversely affect the future development and operations of Paytm First Games.”

Paytm is subject to compliance by various regulatory bodies like MCA, SEBI, RBI, IRDA apart from privacy and data protection laws. It is also subject to compliance and operational risks in other geographies where it is present like  Canada, Singapore, UAE, Malaysia, Tanzania, Uganda and Bangladesh. It is also subject to advertising laws in regions where it operates since the platform is used for advertising as well.

Litigations

The company- One97 Communications has 69 legal proceedings pending against itself, its directors and subsidiaries amounting to claims worth over INR 38,000 Mn. The parent company has 23 criminal proceedings and 18 tax litigations pending. There are 22 tax proceedings against subsidiary companies.