Indian Financial Crime Watchdog Investigates Paytm Subsidiaries Over Alleged Violations

India’s financial crime enforcement agency has issued a show-cause notice to Paytm regarding alleged violations of the Foreign Exchange Management Act (FEMA) linked to its past acquisitions.

Regulatory Scrutiny on Paytm’s Subsidiaries

The allegations pertain to Paytm’s acquisition of Little Internet Private Limited and Nearbuy India Private Limited during the period between 2015 and 2019—a time that predates Paytm’s ownership of these entities.

In response, Paytm reaffirmed its commitment to regulatory compliance and corporate governance, stating:

“Paytm upholds principles of transparency, governance, and compliance in all its business practices. This matter is being addressed with a focus on resolving it in accordance with applicable laws. There is no impact on Paytm’s services to its consumers and merchants, and all operations remain fully functional and secure.”

Regulatory Challenges and Financial Setbacks

The latest scrutiny follows a series of regulatory challenges for Paytm. In January 2024, the company faced a major setback when the Reserve Bank of India (RBI) shut down Paytm Payments Bank, citing compliance concerns and unregulated data flows between the bank and its parent company.

This regulatory action had a significant financial impact on Paytm, as reflected in its third-quarter earnings report, which showed:

• A 36% decline in revenue, dropping to 18.3 billion rupees ($212 million)—lower than analysts’ projections of 19 billion rupees.
• A net loss of 2.08 billion rupees, though an improvement over the 3.32 billion rupees loss analysts had anticipated.

Strategic Adjustments to Navigate Market Challenges

Following the closure of its banking operations, Paytm has been actively restructuring its business model, including:

• Forging new partnerships with Indian banks to continue offering payment services.
• Selling off its movie and event ticketing business to Zomato to streamline operations and reduce expenses.
• Awaiting regulatory approval to operate as a payment aggregator, allowing it to process transactions independently.

Increasing Competition in India’s Digital Payments Sector

Once a dominant player in India’s digital payments ecosystem, Paytm now faces intense competition from global giants such as Google Pay and Walmart-backed PhonePe. The regulatory challenges surrounding its banking operations have caused it to lose market share to these rivals.

CEO’s Perspective: A Path to Recovery?

Despite these setbacks, Paytm’s founder and CEO, Vijay Shekhar Sharma, remains optimistic about the company’s future. Speaking to Bloomberg News in January, he expressed confidence that the situation would improve:

“As far as the bank is concerned, which is a separate entity, now we are pretty much at an arm’s length, so it should get sorted out soon. We’ve learned our lessons and have dramatically changed our approach towards the business.”

As Paytm navigates ongoing regulatory and financial challenges, its ability to restore investor confidence, comply with evolving regulations, and regain market share will be critical in shaping its long-term trajectory.