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The shares of Paytm’s parent company One97 Communications surged in the stock market, hitting the upper circuit of 5% for the third consecutive session on Tuesday. The company’s stock rose to Rs 376.45 and Rs 376.25 on the BSE and NSE, respectively.

The development comes after reports suggesting that the Enforcement Directorate (ED) has not yet found any foreign exchange violations while investigating Paytm Payments Bank Ltd (PPBL). However, the central investigating agency has reportedly identified lapses in know-your-customer (KYC) norms and concerns regarding the generation of suspicious transaction reports.

Last week, ED formally initiated a probe into overseas transactions by PPBL, alleging breaches of foreign exchange rules.

On Monday, the shares of One97 Communications surged 5% after announcing a collaboration with Axis Bank to continue merchant settlements, ensuring the continuity of QR codes, soundbox, and card machine operations beyond the RBI’s March 15 deadline.

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Paytm Payments Bank fiasco has drawn fintechs’ attention to compliance of laws: Rajeev Chandrasekhar

In the past, PPBL served as a Payments Service Provider (PSP) bank for One97. As PPBL functions as a bank, Paytm did not need to engage in a partnership with another bank to facilitate UPI transactions.

The recent partnership with Axis Bank enables Paytm to adopt a third-party partnership model, aligning itself with the operational framework employed by other prominent UPI apps such as PhonePe, Google Pay, and Amazon Pay.

Following the RBI’s January 31 order, PPBL was directed to not take any further deposits, conduct credit transactions or carry out top-ups on any customer’s accounts, prepaid instruments, wallets, and cards for paying road tolls after February 29, with the deadline later extended to March 15. 

Amid regulatory scrutiny and violations related to its payments bank business, Paytm shares rebounded 5% on Friday after a three-day fall. Despite holding a 49% stake, One97 Communications classifies PPBL as an associate rather than a subsidiary.

During an interview with PTI last week, Rajeev Chandrasekhar, the Union Minister of State for Electronics and IT, noted that the Paytm Payments Bank situation is a case where a dynamic and assertive entrepreneur failed to recognise the importance of regulatory compliance. He emphasised that no company can escape consequences if it fails to adhere to legal requirements.

According to a research report by Bernstein, Paytm is expected to experience minimal impact on its overall business, with the prospect of a revival in its wallet and FASTag services through new banking deals. The brokerage firm, in its report dated February 19, 2024, maintained an ‘outperform’ rating for Paytm and set a target price of Rs 600. This positive outlook is attributed to regulatory clarity.

Bernstein’s target price of Rs 600 suggests a potential upside of over 50% from the current market price. The report underscored opportunities for positive surprises in net payments processing margins.

In its report, the brokerage noted that the regulatory measures primarily affect the PPBL entity and expects Paytm to successfully implement operational changes, reducing dependence on PPBL with limited long-term consequences for the overall business. Despite PPBL-specific actions, Bernstein predicted limited damage to Paytm’s user and merchant base, emphasising their importance for long-term success.

The report noted that if Paytm secures favourable terms with new partners without offering additional incentives to retain users, the impact on margins could be less than anticipated. This, in turn, could unlock further stock value for Paytm.

(With additional inputs from PTI.)