The Enforcement Directorate (ED) has issued a show cause notice to fintech giant Paytm over alleged violations of India’s foreign exchange laws. The notice pertains to Paytm’s acquisition of Little Internet Private Limited (LIPL) and Nearbuy India Private Limited (NIPL), the latter being the former Groupon India, between 2015 and 2019.
Details of the ED Notice
Paytm’s parent company, One97 Communications Limited (OCL), confirmed the receipt of the notice in an exchange filing. The notice also includes LIPL, NIPL, and several current and past directors and officers of these companies.
According to Paytm, some of the alleged violations occurred before LIPL and NIPL became its subsidiaries, implying that they might not be directly attributable to Paytm itself.
The ED’s notice cites violations under Section 6(3) (a & b) of the Foreign Exchange Management Act (FEMA), 1999:
- Section 6(3)(a): Prohibits Indian residents from issuing or transferring foreign securities.
- Section 6(3)(b): Restricts non-residents from transferring securities in India.
The show cause notice relates to a total transaction value of INR 611.17 crore, distributed as follows:
- INR 245.2 crore linked to OCL (Paytm’s parent company).
- INR 344.99 crore linked to LIPL.
- INR 20.97 crore linked to NIPL.
Will This Affect Paytm’s Business?
Despite the ED’s notice, Paytm asserts that this development will not impact its business operations. The company stated that the ED has not yet specified any penalties or demands, and it is currently consulting legal experts to determine the best course of action.
Paytm reassured its users and merchants, saying:
“There is no impact of this matter on Paytm’s services to its consumers and merchants. All services remain fully operational and secure.”
Regulatory Scrutiny Not New for Paytm
This is not the first time Paytm has come under regulatory scrutiny:
- 2024: The ED launched a preliminary inquiry into Paytm Payments Bank after the Reserve Bank of India (RBI) took action against the entity.
- Findings: While the ED did not find any major breaches, it uncovered violations of Know Your Customer (KYC) norms.
Recent Business Moves & Financial Performance
Amid the regulatory challenges, Paytm recently announced a partnership with US-based AI search engine Perplexity, aiming to offer real-time financial assistance to users via the Paytm app.
Financially, the company is still struggling but showing some improvement:
- Net loss narrowed by 6% to INR 208.5 crore in Q3 FY25, compared to INR 221.7 crore in Q3 FY24.
- Revenue from operations fell by 36%, dropping from INR 2,850.5 crore in Q3 FY24 to INR 1,827.8 crore in Q3 FY25.
Analysis & Fact-Check
- ED’s Notice & FEMA Violations:
- While the ED has raised concerns, Paytm argues that some of the alleged violations occurred before LIPL and NIPL became its subsidiaries.
- The lack of a penalty or specific demand suggests that the case is still in its early stages.
- Impact on Paytm’s Business:
- Paytm’s core services remain unaffected, and the company is legally addressing the issue.
- However, repeated regulatory scrutiny could impact investor sentiment and long-term confidence.
- Decline in Revenue & Profitability:
- Paytm’s 36% revenue drop in Q3 FY25 is concerning, indicating potential business challenges beyond regulatory hurdles.
- The partnership with Perplexity AI could be a strategic move to boost engagement and revenue streams.
While Paytm is once again facing regulatory scrutiny, the company maintains that its operations will continue as usual. The lack of a defined penalty or financial demand from the ED suggests that the case is in an early investigative stage. However, the ongoing scrutiny, coupled with declining revenue, raises questions about the company’s future growth strategy.
As Paytm works through legal challenges, it remains to be seen whether its AI partnerships and business restructuring efforts can offset financial declines and restore investor confidence.
