Paytm shares hit 10% upper circuit in afternoon trade; here is why

Shares of One 97 Communications Ltd (OCL), the parent firm of fintech Paytm, hit a 10% upper circuit during the last hour of the trade on Friday, July 26, after news reports said that the company has received approval from the government for its ₹50 crore ($5.97 million) investment in its subsidiary, Paytm Payment Services Ltd (PPSL). 

The approval, which was pending for months due to the company's link to China, will remove the main stumbling block to the unit, Paytm Payment Services, resuming normal business operations, news agency Reuters reported.

Paytm Payment Services is one of the biggest remaining parts of the fintech firm's business, accounting for a quarter of consolidated revenue in the financial year ended March 2023, the report added.

The government had approved the investment earlier this month, the news agency said.

Dr Vivek Joshi, Secretary, Department of Financial Services, Ministry of Finance, told Reuters that Paytm can now reach out to the Reserve Bank of India (RBI) to seek a payment aggregator license.

In November 2020, PPSL applied for a licence with the RBI to operate as a payment aggregator under the guidelines on Regulation of Payment Aggregators and Payment Gateways.

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 Foreign Direct Investment (FDI) rules.

The banking regulator asked the company in November 2022 to re-submit applications within 120 days after it gets government approval on investment made by OCL into PPSL as per FDI guidelines.

The regulator asked PPSL to continue operations with the condition that no new merchants should be onboard.

After the completion of 120 days, RBI again granted PPSL an extension but without removing the bar on new merchant onboarding.

Under Press Note 3, the government had made its prior approval mandatory for foreign investments in any sector from countries that share a land border with India to curb opportunistic takeovers of domestic firms following the COVID-19 pandemic.

Countries which share land borders with India are China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar and Afghanistan.

Paytm has received significant investments from Chinese companies. "We would also like to highlight that there have been changes in the ownership structure of the Company, with the Paytm founder, Mr Vijay Shekhar Sharma, now being the sole Significant Beneficial Owner. This was informed to the stock exchanges on September 03, 2023," the company had said in a regulatory filing in February.

Paytm in August 2023 announced that Sharma would acquire a 10.3% stake in Antfin through his overseas entity Resilient Asset Management BV, which will make him the largest stakeholder in the company with a 19.4% stake. In return, Resilient issued a debt instrument --optionally convertible debentures, to Antfin thereby maintaining the economic interest of Alibaba group firm.

With this transaction, Antfin's direct stake in Paytm was reduced to 13.5 per cent. Antfin further sold 3.6% in Paytm to bring its shareholding to less than 10% and at present holds 9.89% of the fintech firm.