Top 10 excerpts of risk from Paytm draft IPO papers

Thursday morning, India’s currently most awaited listing to the bourses, a representative from an ecosystem that is yet to mature from its obsession with magical horses, Paytm filed its draft red herring prospectus. 

The total IPO size stands at Rs 16,600 crore (about $2.23 billion as per current exchange rates). The primary issue is worth Rs 8,300 crore, and the secondary issue from selling shareholders is the balance Rs 8,300 crore. 

A pre-IPO plan, of issues amounting up to Rs 2,000 crore, may also be undertaken by Paytm at its own discretion, prior to filing of the final IPO document. 

Here are the top 10 handpicked excerpts and direct quotes from the 497-paged One97 Communications (Paytm parent company) document that is currently under markets regulator SEBI’s scrutiny: 

• Paytm has incurred net losses for the last three years, including a restated loss for a year including discontinued operations of Rs 4,235.5 crore in FY19, Rs 2,943.3 crore in FY20, and Rs 1,704 crore in FY21.

“We expect to continue to incur net losses for the foreseeable future and we may not achieve or maintain profitability in the future. Because the market for our platforms, products and services is evolving, it is difficult for us to predict our future results of operations or the limits of our market opportunity.” 

• Paytm expects operating expenses to increase as it will hire more, expand operations and infrastructure, both domestically and internationally, further enhance platforms, and develop products.

“In addition, when we become a listed company, we will incur additional significant legal, accounting, and other expenses that we did not incur as an unlisted company. Any failure to increase our net revenue sufficiently to keep pace with our initiatives, investments, and other expenses could prevent us from achieving or maintaining profitability or positive cash flow on a consistent basis in future periods.” 

• Paytm mainly derives revenue from fees it charges merchants for the payments, commerce and cloud, and financial services. Its total merchant base has grown from 11.2 million as of March 2019 to 21.1 million as of March 2021. Gross merchandise value has increased from Rs 2,292,00 crore in FY19 to Rs 4,033,00 crore in FY21.  

“If we are not able to attract new merchants and retain existing merchants or increase transaction volumes on our platforms, our payment channels may struggle to gain wider acceptance among merchants, which in turn may impede our ability to grow our revenues.” 

• In FY19, FY20 and FY21, revenue from Paytm’s payment and financial services accounted for 52.5%, 58.1% and 75.3% of its operational revenue, respectively. As Paytm continues to derive much of its top-line from payment services, its efforts to expand to newer service offerings and markets also continue. 

“...our revenue may also be affected by our service mix. We generate higher fees from the use of certain payment instruments compared to others. For example, we do not charge any fees for certain transactions through Rupay debit cards and UPI to comply with prescribed merchant discount rates. Any unfavourable changes in merchant discount rates could have a material adverse impact on our operations, cash flows and financial condition.” 

• The pandemic has adversely impacted, and is likely to continue to adversely impact operations of Paytm as well as its merchants and business partners. Lockdowns impacted the company’s commerce and cloud business. Revenue from service line was down by 38% to Rs 693.2 crore FY21. But revenue from payments and financial services increased in FY21, and eventually payment volumes picked up too. Any failure to maintain and improve Paytm’s technology infrastructure could result in unanticipated system disruptions, slower response times, impaired consumer experience, delays in reporting accurate operating and financial information and failures in risk management.

Such risks are higher during peak activity hours. Most of Paytm’s software and interfaces are internally developed and proprietary technology. 

“We have experienced and will likely continue to experience system failures and other events or conditions from time to time that interrupt the availability or reduce or affect the speed or functionality of our platform.” 

• As per Tracxn data, Paytm has made 11 acquisitions and 15 investments so far. Doing so, it has spent over $37 million. Recent exits include Tiger Global Management backed startups Loginext, and Cube26 Software.  

“We may in the future seek to acquire or invest in businesses, apps, or technologies that we believe could complement or expand our products and services, enhance our technical capabilities, or otherwise offer growth opportunities... If an acquired business fails to meet our expectations, our business may be materially and adversely affected.” 

• Paytm is required to pay payment processing charges to financial institutions and card networks for processing transactions on our platform. The costs depend on the category of merchant, payment instrument used by the consumer, size and number of transactions processed on its platforms, the network through which the transaction is routed, among other factors. 

“Our profitability could be negatively affected if our payment processing charges payable to financial institutions and card networks increase significantly, and we are not able to pass on these higher processing charges to our merchants or consumers.” 

Read: RBI restrains Mastercard from onboarding new India customers

Regulatory risks 

In January 2021, One97 Communications created Paytm Payments Services, a subsidiary using which it applied to the Reserve Bank of India (RB) for authorization to transfer its payment aggregator services business to the new entity. It is yet to receive authorization. The authorization needs to be met for compliance requirements under RBI’s new Payment Aggregators Guidelines, which stipulate that a single entity cannot continue to provide an e-commerce marketplace along with payment aggregator services. 
 
Furthermore, NPCI will soon start restricting third-party applications like Paytm from initiating UPI transactions in excess of 30% of the total volume of UPI transactions processed during the preceding three months, on a rolling basis. 
 
Additionally, uncertainty in the regulatory framework of online gambling in various state legislations could adversely affect the future development and operations of Paytm First Games. Paytm First Games offers certain skill based real money games on its platforms. 
 
“We may be adversely affected by the evolving laws and regulation governing our business and the introduction of any new laws and regulation which may become applicable to our business.” 

As per an RBI notification of June 2021, new investors from intergovernmental Financial Action Task Force (FATF) declared non-compliant jurisdictions such as Mauritius, Cayman Islands and Uganda are no more permitted to acquire, directly or indirectly, 20% or more of the voting power of any existing payment system operators (PSO). 
 
“FNPL, a consortium entity in which we have participated along with other participant companies, for a PSO license, will accordingly be subject to the requirements of this notification, which may have an adverse effect on the ability of new foreign investors from FATF non-compliant jurisdictions to, directly or indirectly, invest in FNPL and/or our Company. Our ability to set up other regulated businesses may also be subject to the requirements of this notification, and have similar implications.”