India's Paytm faces licence uncertainty as RBI order wipes $2 billion off shares

By Chris Thomas, Siddhi Nayak and Ira Dugal

BENGALURU (Reuters) -Paytm Payments Bank's digital wallet business may not be able to operate after Feb. 29 unless India's central bank approves a transfer of its licence to parent group One 97 Communications, two sources directly familiar with the matter said.

The Reserve Bank of India (RBI) on Wednesday ordered the payments bank subsidiary of One 97 Communications, popularly known as Paytm, to stop accepting fresh deposits in its accounts or popular wallets from March.

Paytm's banking business powers most features of India's most popular digital payments app, which competes with the likes of Walmart's PhonePe and Google. Paytm has 330 million digital wallet accounts, which many people in India use to transfer funds, pay bills and keep a digital wallet for retail payments.

In a call with analysts on Thursday, Paytm said it hopes to keep the digital wallet business operational by forging new banking relationships and its CEO Vijay Shekhar Sharma said such partnerships would "not be difficult to execute".

But keeping the digital wallet business running may not be possible as Paytm Payments Bank holds the licence, the sources said. For this licence to be transferred back to Paytm, the RBI would have to give approval, which could prove difficult given concerns raised by the central bank, the first source said.

A third person familiar with the development said that clarity has been sought from the RBI, adding: "There is a lot of back-and-forth regarding clarity about the (wallet) license transfer between RBI and Paytm currently".

A spokesperson for Paytm, which owns 49% of the payments bank, and RBI did not immediately respond to an email.

Sources at five Indian banks said they would exercise caution about doing business with Paytm because of the RBI's concerns, even if a licence transfer does take place.

Any partnership with Paytm, specifically to provide banking services to their digital wallets business, would also need a prior approval from the RBI, these sources said.

None of the banking sources wished to be identified since they were not authorised to speak with the media.

The RBI said the action was taken due to Paytm Payments Bank's non-compliance with rules and supervisory concerns, which a source with knowledge of the matter said stretched over years.

Sharma on Friday sought to reassure app users.

"Your favourite app is working, will keep working beyond 29 February as usual," he said in a post on X, adding: "For every challenge, there is a solution and we are sincerely committed to serve our nation in full compliance".

Shares in India's Paytm plunged 20% for a second straight day on Friday, in a rout which has wiped about $2 billion off its market value. Paytm, which has a long history of problems, now faces its biggest crisis to date.

Paytm shares were at 487.2 rupees on Friday, near record lows marked in 2022, and valuing the company at $3.7 billion.

At least five analysts cut their ratings on the stock to sell after the RBI order and seven slashed their target prices to between 450-750 rupees, LSEG data shows.

JP Morgan said RBI's action impairs Paytm's "profit pools, network effects and credibility" and "materially impacts" its core payments business which accounts for 59% of its revenues.

Another casualty of the RBI order will be Paytm's digital highway toll payment service, or FASTag which users will not be able to replenish after Feb. 29, Jefferies said, adding that Paytm has a 17% share of that market.

Last year, the RBI fined Paytm Payments Bank $650,000 for non-compliance, including on "know your customer" rules. In 2022, it barred the bank from taking on new customers and ordered a comprehensive IT system audit.

That move came months after Paytm saw a dramatically underwhelming stock market listing amid concerns about the company's valuation, its complex business model and slow road to profitability.

(Reporting by Chris Thomas in Bengaluru, Siddhi Nayak and Ira Dugal in Mumbai; Editing by Aditya Kalra, Edwina Gibbs and Alexander Smith)