Govt examining FDI flow from China in Paytm Payments Services

Govt examining FDI flow from China in Paytm Payments Services

Subject: Economy

Section: External Sector

Context: The government is examining foreign direct investment from China in Paytm Payments Services Ltd (PPSL), the payment aggregator, subsidiary of One97 Communications Ltd. (OCL).

As, OCL has investment from Chinese firm Ant Group Co.

Details:

What is Paytm?

• Paytm is an Indian multinational financial technology company.
• Specializes in digital payments and financial services, based in Noida, India.
• Paytm was founded in 2010 by Vijay Shekhar Sharma under One97 Communications.

What is Paytm Payments Bank?

• Paytm Payments Bank (PPBL) is an Indian payments bank, founded in 2017 and headquartered in Noida.
• In 2017, it received the license to run a payments bank from the Reserve Bank of India and was launched in November 2017.
• In 2021, it received a scheduled bank status from the RBI.

What is a Payments Bank?

• Payments banks are a new model of banks, conceptualised by the Reserve Bank of India (RBI) under Section 22 of the Banking Regulation Act, 1949 and one of recommendation of Nachiket Mor committee.
• These cannot issue credit, loans and credit cards.
• These banks can accept a restricted deposit, which is currently limited to ₹200,000 per customer and may be increased further.
• Both current account and savings accounts can be operated by such banks.
• Payments banks can issue ATM cards or debit cards and provide online or mobile banking.
• Bharti Airtel set up India’s first payments bank, Airtel Payments Bank.

Series of Events:

• In November 2020, PPSL had applied for licence with the Reserve Bank of India (RBI) to operate as Payment aggregator under the guidelines on Regulation of Payment Aggregators and Payment Gateways.

Payment Gateways

• A payment gateway is a payment processing software.
• Technology providers that offer support for and integrate routing and processing of electronic payments, for instance by disseminating transaction data.
• Payment gateways only deal with online transactions and are equipped with restricted payment options.
• Have no connection to the funds.
• Examples-Axis bank, HDFC, Union Bank of India, etc, as in India, most banks act as payment gateways.

Payment Aggregators

• The Payment aggregators are intermediaries that help-
• Merchants make available payment methods (for electronic payments) to customers
• Collect payments from customers
• Pool funds received from customers towards the amounts due to merchants
• Transfer fund to merchants to settle customers’ payment obligations.
• Examples: PayPal, Stripe, Square, and Amazon Pay.

However, in November 2022, RBI rejected PPSL’s application and asked the company to resubmit it, so as to comply with Press Note 3 under FDI rules.

• Press Note 3 of FDI:
• The government had made its prior approval mandatory for foreign investments in any sector from countries that share land border with India (China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar and Afghanistan) to curb opportunistic takeovers of domestic firms following the Covid-19 pandemic.
• Subsequently, the company filed the required application on December 14, 2022 with Government of India for past downward investment from OCL into the company in order to comply with Press Note 3 prescribed under FDI guidelines.
• PPSL followed the relevant guidelines and submitted all relevant documents to the regulator within the stipulated time.
• During the pending process, PPSL was allowed to continue with its online payment aggregation business for existing partners without onboarding any new merchants.
• New ownership structure:
• The Paytm founder remains the largest stakeholder in the company.
• Ant Financial reduced its stake in OCL to less than 10 per cent in July 2023. Subsequently, it does not qualify for beneficial company ownership.
• To constitute FDI — ten per cent or more of the post issue paid-up equity capital , hence out of FDI approval process .
• OCL, founding promoter now holds a 24.3 per cent stake.
• An Inter-ministerial committee is examining investments from China in PPSL and decision would be taken on the FDI issue after due consideration and comprehensive examination.
• RBI had said that these reports revealed persistent non-compliances and continued material supervisory concerns in PPBL, warranting further supervisory action.
• On March 11, 2022, RBI had barred PPBL from onboarding new customers with immediate effect.
• The Reserve Bank last month barred Paytm Payments Bank Ltd (PPBL), an associate company of OCL, from accepting deposits or top-ups in any customer account, prepaid instruments, wallets, and FASTags, among others after February 29, 2024.