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paytm ipo details: Red herring, red flags: Top 10 takeaways from Paytm’s draft IPO filing

Mumbai | Bengaluru: Paytm
has filed its much-awaited draft red herring prospectus (DRHP) for a Rs 16,600 crore initial public offering (IPO).

The company’s IPO prospectus includes several red flags that every investor, institutional or retail, who plans to participate in the company’s public offer should know about—including run-ins with regulators and investors, a relative of the founder having significant influence on the company, and criminal proceedings and tax cases against Paytm and its directors.

Here then are the top 10 takeaways from Paytm’s IPO filing:

1. Pre-IPO lock-in: Paytm has said it may raise up to Rs 2,000 crore in a pre-IPO round. Those who invest in this round will not be allowed to sell their shares for a year. If the pre-IPO placement is completed, the fresh issue size will be reduced by the amount raised.

2. Large investors will sell shares: Paytm’s large investors will sell parts of their holdings in the company. These are Ant Group, Alibaba, SoftBank and Elevation Capital (formerly Saif Partners). While Ant and Alibaba own a combined 38% in Paytm, SoftBank holds 18.73% and Elevation Capital has a 17.65% stake. Paytm founder Vijay Shekhar Sharma, who owns about 15% in the firm, will also offload some of his shares.

Paytm shareholding patternETtech

(Graphic: Rahul Awasthi/ETtech)

Also Read:
China’s Ant Group may sell about 5% of Paytm via OFS

3. Paytm will remain foreign-owned: Paytm said it currently is a “foreign-owned and controlled” company and will continue to be so after the IPO in accordance with consolidated FDI policy and foreign exchange rules and “accordingly we shall be subject to Indian foreign investment laws”.

  • Significant influence: Paytm has listed all its major investors, such as SoftBank, Elevation Capital, Alibaba and Ant Group, as entities with significant influence over the firm. Last year, before Ant’s IPO plans were thwarted by Chinese government, Ant had listed Paytm in its IPO prospectus as a company over which it has significant influence.
  • Brother in arms: Vijay Shekhar Sharma’s brother Ajay Shekhar Sharma is also listed as a relative who “owns interest in the voting power of the Group that gives them control or significant influence”.

4. Losses to continue: Paytm has made a net loss for the past three years and expects this to continue for the foreseeable future. In FY20 and FY21 it reported losses of Rs 2,943 crore Rs 1,704 crore, respectively.

  • Why this outlook? The company said, “Because the market for our platforms, products and services is evolving, it is difficult for us to predict our future results of operations or the limits of our market opportunity.” Paytm expects its operating expenses to increase as it plans to hire additional personnel, and expand operations and infrastructure in India and abroad.

Also Read:
Paytm revenue shrinks 14%, loss narrows to Rs 1,701 crore in FY21

5. Sebi’s caution on Paytm Money: Paytm said the Securities and Exchange Bureau of India (Sebi)
has observed ‘certain violations’ of laws and regulations by Paytm Money on its uploading of clients’ KYC data and providing investment advice. It said the market regulator issued a written warning to Paytm Money to take corrective steps. Paytm Money submitted its response last July.

The firm also suspended its advisory business on March 31, 2021, after being notified by Sebi in February about the new advisory guidelines.

6. Run in with regulators on insurance: Paytm, a foreign owned company, bought a 100% stake in its insurance broking subsidiary between November 2019 and February 2020 after the government said foreign firms could increase their stake in insurance intermediaries from 49% to 100%. However, RBI flagged this deal under the Foreign Exchange Management Act (FEMA), which was updated to include the new FDI limit only in April 2020. Paytm has sought post-facto approval from the government, which is still being processed and is subject to incremental scrutiny.

7. Paytm’s NUE could face hurdles: Paytm confirmed
it has applied to the RBI for a new umbrella entity (NUE) licence to set up a new retail payments body. This will be done via a group subsidiary, Foster Payments Network Ltd., as a nine-company consortium entity.

However, a rule introduced by the RBI in June 2021 prohibits any investor in a country that does not comply with the rules of the Financial Action Task Force (FATF) from owning more than 20% voting rights in a payment system operator (PSO).

  • FAFT the global money-laundering and terrorist-financing watchdog. Countries that do not comply with its rules include Mauritius, Uganda and the Cayman Islands.

This rule could act as roadblocks for future investments in the NUE, Paytm said.

8. Paytm’s loan to founder for insurance buy: The company said it has
proposed to give a loan of nearly Rs 492 crore in the form of optionally convertible debentures (OCDs) to VSS Holdings Pvt. Ltd., which is 100% owned by Paytm founder Vijay Shekhar Sharma.

“The funds, if infused, will be used for the purpose of investing in PIT (which in turn would be further investing the money in RQBE Transaction). Our Company would have the option of converting these OCDs into equity shares (subject to regulatory approvals) of VSS Holdco,” it said. Currently, there is no certainty that this transaction will go ahead, Paytm added. We
reported about the loan arrangement in June.

9. Ratan Tata, Warren Buffett to sell some shares: Ant Group, Alibaba and Elevation Capital aren’t the only high-profile Paytm investors looking to sell some of their shares. Ratan Tata, who owns around 75,000 Paytm shares through RNT Associates, is planning to offload some of them. Warren Buffett’s Berkshire Hathaway Holdings, which owns 17 million Paytm shares, will offload a tiny portion—about 1,200 shares—in the IPO.

10. Non-debt liabilities, penalties, lawsuits galore: Paytm’s liabilities that are not structured as debt arrangements (typically, security exposures can also be penalties and arrears) amount to Rs 47.6 crore as of March 31.

The startup also has an unresolved income tax matter amounting to Rs 1.6 crore.

Additionally, there are 25 unresolved criminal proceedings and 40 tax litigations against Paytm, its subsidiaries and directors.

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