PhonePe's due diligence on ZestMoney was unsatisfactory: Sameer Nigam on deal collapse

ZestMoney was also given a loan of about $18 million last year by PhonePe, which acted as a ‘lifeline’ for the company, said Sameer Nigam, co-founder, CEO, PhonePe

The due diligence that PhonePe carried for nearly six months while evaluating the much-anticipated acquisition of ZestMoney did not meet its bar, said Sameer Nigam, co-founder and CEO of the fintech decacorn, commenting on the deal for the first time on record.

"The way it works is first you talk to investors or the management and you agree on a number and then based on that number, you enter due diligence (DD). Now DD can be short, DD can be long and we generally do long DDs,” Nigam told Moneycontrol in an interview on the sidelines of PhonePe’s launch of Pincode, its e-commerce app built on ONDC (open network for digital commerce).

“We usually do long DDs. We have learned in the past what we need to know beforehand, so we were more rigorous in our DD and it didn’t really meet our bar,” Nigam added.

Nigam’s comments on the ZestMoney deal falling through were the first official acceptance of the acquisition deal by PhonePe, which it was evaluating since last year and was first reported in November 2022. Both PhonePe and ZestMoney had stayed away from commenting on it officially.

When asked if PhonePe’s move to walk away from the deal was in ‘bad faith,’ Nigam said, “There's only two things we were looking to buy. One was the assets, the other was the people. So that is part of the DD. That is not why it fell, though. We liked the people for whatever it matters,” suggesting that ZestMoney’s assets were the primary reason for PhonePe to pull out of the deal.

Last week, Moneycontrol reported that PhonePe had called off the deal over due diligence concerns, leaving the buy-now-pay-later (BNPL) platform, backed by investors like Goldman Sachs, with little financial runway. ZestMoney is also evaluating layoffs and its founders are reaching out to a bunch of startups for outplacement opportunities for its employees, Moneycontrol reported.

According to a person with direct knowledge of the matter, PhonePe is absorbing as many as 200 employees from ZestMoney. But when asked if PhonePe was looking to hire any of ZestMoney’s employees, Nigam said, “there are discussions happening in the background,” declining to comment on it in more detail.

ZestMoney was also given a loan of about $18 million last year by PhonePe, which acted as a ‘lifeline’ for the company, Nigam said, adding that the BNPL platform was on the verge of getting bankrupt when he first met them. Last week Moneycontrol reported that PhonePe might extend another credit line to ZestMoney. Nigam accepted the development and said that there are discussions happening in the background and his finance team knows more about it.

PhonePe’s decision to pull out from the ZestMoney acquisition deal highlighted the stress in the BNPL sector that was hit by the Reserve Bank of India (RBI)’s crackdown on digital lending last year.

The RBI issued a notification forbidding operating non-bank institutions or fintech companies, including many of the 'buy now, pay later' services, from loading credit lines onto Prepaid Payment Instruments (PPI) such as wallets and prepaid cards. Since then ZestMoney was looking for a buyer, sources told Moneycontrol.

Nigam also sounded pessimistic on the BNPL space.

“I have never been a BNPL fan. If you are giving BNPL lines to people who are otherwise not previously known to be creditworthy, this whole business of saying I can use a BNPL line to figure out whether your credit score will be good, which is where fintechs ended up, was always going to end into the dark lane,” said Nigam.

“BNPL is like a virtual credit card for me. You can call it whatever you want, but its loan in another name. If you are lending to people you don’t know beforehand and if you are doing it in real time, then.. real time is the enemy of good underwriting,” he added.