RBI Action Against Paytm: Regulatory Scrutiny and Leadership Changes

Company board shake-up to steer Paytm Payments Bank; Vijay Shekhar Sharma resigned as Non-Executive Chairman and Board Member; Sharma will continue as MD of Paytm

New Delhi: Vijay Shekhar Sharma will step down as non-executive chairman and board member of Paytm’s payments bank; the move is part of RBI’s action against Paytm for violating regulations. The resignation is part of entirely disbanding the digital payments company’s board.

Reshaping the Board and Leadership Transition

Sharma will be replaced by former RBI chairman Srinivasan Sridhar, former Bank of Baroda executive director Ashok Kumar Garg, and two retired IAS officers will join the new board, Paytm said. Surinder Chawla, CEO of Paytm Payments Bank, stated that the expertise of these new board members will improve the bank’s governance and operational quality.

By stepping down and bringing in independent directors, Sharma facilitates power transfer. However, he will retain his 51% stake in Paytm Payments Bank. One97 Communications holds the remaining 49% stake. Reports suggest Sharma will continue to serve as Paytm’s managing director.

The money laundering case has prompted the Enforcement Directorate to investigate Paytm Payments Bank. Paytm is also being investigated for allegedly breaking foreign exchange regulations, which it claims are untrue.

Implications of Regulatory Action

Regulatory scrutiny compounds headaches for Vijay Shekhar Sharma as the Enforcement Directorate launches a further investigation. Last month, the RBI barred Paytm Payments Bank from accepting new deposits and carrying out loan transactions and top-ups through customers’ accounts. It also prohibited prepaid wallet and FASTag NCMC card top-ups linked to Paytm accounts. However, the central bank clarified that customers can continue utilizing their remaining account balances up to a limit.

Initially, the RBI had ordered all Paytm transactions to halt by March 15 but extended the deadline to February 29 in the public interest of merchants and consumers. The stern regulatory action comes after a comprehensive audit found non-compliance with RBI regulations and directives. The RBI also cancelled the nodal accounts of Paytm’s parent, One97 Communications Ltd, and Paytm Payments Bank Ltd (PPBL).

While RBI has cracked down on Paytm’s banking operations, customers can still use services like UPI for digital transactions if their accounts are linked to other banks. NCMC cards can also be utilized until the existing balances are exhausted.

So what triggered the RBI scrutiny of Paytm Bank?

Primarily, hundreds of accounts were created, needing proper identification documentation. It was discovered that crores worth of transactions occurred through Paytm accounts without adequate know-your-customer (KYC) submission. It raised suspicions of potential money laundering. RBI and external auditors found over 1,000 users had linked the same PAN number to their accounts.

This action follows ongoing reports of Paytm Payments Bank violating RBI regulations. The RBI has had its eye on Paytm since early 2023, previously imposing a Rs 5.39 crore penalty over non-compliance complaints. In 2022, the RBI had instructed Paytm to stop onboarding new users, but the company still needs to comply. The central bank has clarified its actions against Paytm, stemming from a comprehensive systems audit report and persistent complaints from external auditors. Punitive measures have been taken under Section 35A of the Banking Regulation Act of 1949.

Regulatory Responses and Industry Implications

RBI has taken decisive action against Paytm Payments Bank. This shows the regulator is looking at financial technology companies more closely. RBI wants to make sure these companies follow banking rules. Fintechs like Paytm have made financial services more accessible. But their fast growth can only be risky with good oversight.

Paytm failed to enforce the “know your customer” rules. It allows too many accounts with the same PAN number, which worries the RBI. So, the RBI audited Paytm and penalized it. RBI wants to protect consumers.

As fintechs keep changing India’s banking industry, regulators face challenges. They must balance innovation and prudent supervision. The RBI limits on Paytm aim to fix compliance problems. But Paytm must improve its controls and governance. This will satisfy regulators and maintain public trust. How Paytm responds to the RBI will show something. It will show whether fintech startups can become mature, compliant financial institutions.

Akshay Kumar

Akshay Kumar is a dedicated and accomplished Business Reporter at IndiaFocus. With a passion for financial markets and corporate developments, Akshay brings experience and insight to his reporting. His extensive… More »

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