Several violations of regulatory norms, including rules related to money laundering and related-party transactions, and repeated failure to heed warnings from the Reserve Bank of India (RBI) over an extended period were the primary reasons why the banking regulator ordered Paytm Payments Bank Ltd to stop a bulk of its activities from February 29, people directly aware of the matter said, requesting anonymity.
Faulty KYC processes
A system audit conducted by the RBI into Paytm Payments Bank found several lapses pertaining to adherence to anti-money laundering laws regarding know-your-customer (KYC) documents, according to the people cited above. The RBI found that the company did not conduct proper background checks on the source of funds before onboarding clients, they said.
“There were large volumes of transactions via merchant accounts where the audit found that proper KYC measures were not taken to establish the origin of funds,” one of the people cited above said. “The KYC during onboarding was sometimes inadequate and done by partner firms with which the payments bank had a tie-up. Despite this, the bank went ahead and allowed these merchants to transact,” a person cited above said. “Even if the money is flowing from within the banking system, the entities must ensure proper documentation so that no dubious funds are moved around,” the person said. “Accordingly, a show cause notice was issued to the company,” the person added.
A detailed questionnaire to the spokespeople for RBI and Paytm group in this regard remained unanswered.
Related-party transactions
The second issue was regular related-party transactions with other Paytm group companies, the people said, adding that the banking regulator found that the payments bank was not following proper measures to ring-fence itself from potential conflict of interest. “Due to the high level of interdependence between Paytm Payments Bank and other group entities, the RBI was concerned that the autonomy of the payments bank was in question and that founder Vijay Shekhar Sharma had indirect control over the bank’s decision-making and operations,” a second person said.
In March 2022, the central bank asked Paytm Payments Bank not to onboard any new clients, an order that remains in force. Affiliate firm Paytm Payment Services generated Rs 149 crore and Rs 372 crore from Paytm Payments Bank by providing services in FY23 and FY22, respectively, according to the latest annual report. In turn, Paytm Payment Services also paid Rs 212 crore and Rs 317 crore to Paytm Payments Bank towards processing charges in FY23 and FY22, respectively, according to the annual report of these companies.
Parent One97 Communications Ltd wholly owns Paytm Payment Services and 49% of Paytm Payments Bank, in which founder Sharma owns 51% in his personal capacity.
Paytm Payments also said it has dues of Rs 620 crore from Paytm Payments Bank, the data showed. Overall, One97 Communications received services worth Rs 1,500 crore from Paytm Payments Bank, while it provided services worth Rs 768 crore to the payments bank, according to the parent’s FY23 annual report.
Complex shareholding
The complex ownership structure of Paytm Payments Bank adds to the central bank’s concerns about related-party transactions, the people cited above added. While One97 Communications owns 49% of the bank, about 10% is owned through a joint venture between Sharma and One97. In addition to this, Sharma also controls One97 through his shareholding and directorship without being tagged as a promoter. The central bank also noted certain vulnerabilities in the IT systems of the lender in terms of cloud, data storage and data privacy, which were also flagged to the company on several occasions, but the regulator found lapses despite warnings.
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