Pangulo Updates (2024)

21/02/2024

In the run-up to the crucial extraordinary general meeting (EGM) at BYJU’S on Friday, February 23, leading shareholders are also contemplating a legal battle against Byju Raveendran, the CEO and cofounder of the company.

The EGM, called by six key investors of the company — Prosus, Peak XV, Chan Zuckerberg Initiative, General Atlantic, Sofina, Sands Capital — could determine the future course of the edtech giant.

Besides the EGM, Inc42 has learnt from sources that the group of investors is looking at legal recourse, particularly if their efforts at the EGM are unsuccessful. Investors are looking to secure majority votes (75%) from shareholders to pass a resolution to remove Raveendran from the helm.

Investors are looking to enforce this under the ambit of The Companies Act, 2013, which stipulates the terms for the rights protection of minority shareholders.

However BYJU’S earlier said in an official statement that the shareholders agreement does not permit the investors to vote on CEO or management change.

Meanwhile sources informed us that global investment giant Prosus, which holds a 9.6% stake in BYJU’S after investing nearly $500 Mn, has asked for Raveendran’s ouster before it decides to participate in the ongoing rights issue, which values the edtech giant at $225 Mn post-money, a steep 99% haircut on the company’s previous valuation.

Prosus is said to have asked the BYJU’S leadership about the criteria for the valuation in the rights issue compared to its last valuation of $22 Bn. BYJU’S has reportedly received a commitment of $300 Mn in the ongoing rights issue, PTI report said, quoting sources.

If it does not participate in the rights issue, Prosus stands to lose the most among all key investors. The Netherlands-based investment group is expected to invest another $18 Mn to hold on to its stake.

Peak XV Partners (formerly Sequoia Capital), which has previously divested some of its stake in BYJU’S and currently holds a 7% stake in the company — is calling for the resolution of all impending matters. These include — bringing in more transparency, solving corporate governance challenges and ending the overarching influence of cofounder and CEO Raveendran, sources added.

Given the numerous ongoing legal battles that BYJU’S is currently entangled in with lenders and vendors in both the US and India, it is likely keen to avert another major legal challenge. If they approach the NCLT, investors may also plea for the company’s dissolution to safeguard their interests, according to a lawyer working with a Mumbai-based corporate advisory firm.

What Has Irked BYJU’S Investors?

Primarily, investors seem to have grown tired of issues around opacity in day-to-day operations, delay in sharing the financial statements with shareholders and not having been kept apprised of the Indian government’s action against BYJU’S and founder Raveendran.

Besides this, the group is concerned about the lack of action on corporate governance problems, which also led to the resignation of three key board members in June 2023. These were GV Ravishankar of Peak XV, Vivian Wu of Chan Zuckerberg Initiative, and Russell Dreisenstock of Prosus.

The investors had cited communication blockade from BYJU’S management and corporate governance as the reasons behind the exit of the board members.

In June last year, Deloitte stepped down from its role due to an inordinate delay in filing FY22 financials. BYJU’S then appointed BDO (MSKA & Associates) as its statutory auditor.

Sources added that while presenting its FY22 results, BYJU’S management had disallowed investors from expressing concerns or asking questions. “Only Raveendran spoke and BYJU’S CFO Nitin Golani presented the financials. Why were the investors not allowed to speak?” a representative of a key investor asked.

Sources added that the existing shareholders had also demanded a third-party audit of the company to examine the company financials — a demand that was turned down by Raveendran.

However BYJU’S had said earlier that its AGM was attended by 60 investors and was “interactive” with the new auditor answering all the questions from the shareholders.

BYJU’S net loss had surged 81% YoY to INR 8,245 Cr (close to $1 Bn) in FY22 as WhiteHat Jr and other loss-making acquisitions continued to weigh down the bottom line. In FY22, the startup’s total expenses nearly doubled to INR 13,668 Cr.

As reported exclusively by Inc42, BYJU’S is expected to report total revenue of around INR 6,500 Cr in FY23, 23% higher than the INR 5,298 Cr revenue it has reported for FY22.

Important issues such as the ED crackdown or BCCI’s NCLT case against missed payments only became known to shareholders after news reports, which is a matter of concern, another source close to the investor group told Inc42.

“The BYJU’S management even said that investors are creating an artificial crisis and that the current EGM notice which has gone out to the management and shareholders is stalling the salaries of its employees. How are these two linked?” the source added.

After the resignation of external directors last year, Raveendran, along with his wife Divya Gokulnath and brother Riju Raveendran, took over the control of the board. They collectively own a 27% stake in BYJU’S and reportedly have been able to persuade many investors to participate in the rights issue.

“Raveendran will have the say here since the investors have single-digit stakes in the company and do not have the power to suspend the board or even ask for Raveendran’s ouster. Besides, the board can call for a rights issue even if that comes at value erosion to provide working capital and help it survive. The shareholding contracts have not given investors any say on such matters,” another source in the company said.

As per The Companies Act, 2013, undertaking a rights issue, as compared to raising capital by a preferential allotment or a private placement of securities, does not require shareholder approval by a special resolution. Plus, the board has absolute discretion in determining the valuation of the rights issue, which does not need to be determined based on the valuation report undertaken by a registered valuer.

This is why Prosus, Peak XV Partners, General Atlantic, Chan Zuckerberg Initiative and several other shareholders are likely to approach the NCLT to protect their shareholding if the actions sought via the EGM do not pan out.

K Ganesh, serial entrepreneur and founder of Portea, said there are two options for the investors. “They can either let the rights issue go through or fight this in NCLT, where the company’s survival is at stake. Among these options, the rights issue could be the better option. While the value erosion would be real, at least investors will still have something to hold onto. If the company is forced to wind down, it would be a disaster for everyone.”

Ganesh added that the rights issue is essentially a means to give the company some time to stabilise the business. After six months, the company can also go to investors to raise another external round at a reasonable valuation.

Sriram Subramamian, managing director of InGovern Research Services, acknowledged that the rights issue has been thrust on the shareholders who do not even have board seats. But it will at least prevent BYJU’S from becoming insolvent.

A founder of a Bengaluru-based unicorn expressed shock over the complacency of the BYJU’S shareholder group, especially those who were board members till last year.

“The company has been in the rot for several years now. Surprisingly, the shareholders are now crying foul when they also had board representation but did not raise alarms when the company was acquiring startups without a clear plan and delayed its financials routinely in the past,” he added.

However, legal experts opine that there are adequate laws in instances where the company founders have exerted overarching influence and had a clash with non-promoter investors. While rules exist to preserve the rights of investors, this could result in a major fallout.

Sources also said that some leading investors and founders in the Indian startup ecosystem have also begun negotiating terms between BYJU’S management and the disgruntled shareholders, as any major scale-down in BYJU’S operations will eventually cast an impact on the tech industry of India as a whole and leave thousands of people jobless.

The post Byju Raveendran Vs Investors: Who Will Emerge Victorious In The Battle Royale At BYJU’S? appeared first on Inc42 Media.

In the run-up to the crucial extraordinary general meeting (EGM) at BYJU’S on Friday, February 23, leading shareholders are also contempla...

20/02/2024

The Central Bureau of Investigation (CBI) on Tuesday (February 20) reportedly raided the residential premises of former bureaucrat Ramesh Abhishek.

Prior to his retirement in 2019, Abhishek served as the secretary of the erstwhile Department of Industrial Policy and Promotion (DIPP). The DIPP was responsible for the implementation of the Centre’s Startup India initiative. Later, the DIPP was renamed as the Department for Promotion of Industry and Internal Trade (DPIIT).

Businessworld reported, citing sources, that the raids were conducted in connection with a disproportionate assets case.

As per the report, the Lokpal and the Central Vigilance Commission (CVC) were earlier tipped off by a complainant who alleged that Abhishek favoured 16 companies, including troubled fintech major Paytm, during his stint as a public servant.

Interestingly, Abhishek also serves as an independent director on the board of Paytm Payments Bank, which is facing the ire of the Reserve Bank of India (RBI) for “persistent non-compliance”. He was appointed to the payments bank’s board in December 2021, along with ex-SBI executive Manju Agarwal and banker Shinjini Kumar.

Earlier this month, both Agarwal and Kumar resigned from Paytm Payments Bank’s board.

Meanwhile, the Businessworld report said that in a post-retirement affidavit filed with the Lokpal, Abhishek said he earned over INR 2.7 Cr as professional consultancy fees within 15 months after his retirement.

The aforementioned 16 companies now feature as Abhishek’s clients, as per the report.

The connection with Paytm Payments Bank is expected to ruffle some feathers at the troubled fintech startup.

The development comes on the same day as Paytm hit upper circuit for the third consecutive trading session. Paytm’s shares have been on a downward spiral ever since the RBI cracked its whip on the company and banned it from undertaking deposits or credit transactions, or top-ups in any of its customer accounts.

The central bank also barred the payments bank from offering other banking services, such as UPI facility and fund transfers, after February 29, 2024. Eventually, it extended the timeline for certain prohibitions to March 15.

Reacting to the extension, shares of the company closed Tuesday’s trading session 5% higher at INR 376.45 on the BSE.

The post CBI Raids Residence Of Former DIPP Secretary Ramesh Abhishek appeared first on Inc42 Media.

The Central Bureau of Investigation (CBI) on Tuesday (February 20) reportedly raided the residential premises of former bureaucrat Ramesh A...

20/02/2024

Salt-to-software conglomerate Tata Group could be looking for collaboration with one of the two major Taiwanese semiconductor manufacturers – Powerchip Semiconductor Manufacturing Corporation (PSMC) and UMC Group, for its proposed semiconductor fab unit in Gujarat’s Dholera.

The Indian conglomerate initially plans to manufacture mature nodes at 65 nm, followed by 48 nm and then 28 nm. These nodes will support applications such as graphic processor units (GPU), consumer electronics, and the Internet of Things, over the next few years, as per an ET report.

“The Tata Group has finalised the details of the land for the plant and is likely to break ground soon,” an official told ET.

The plant’s initial capacity is estimated at 25,000 wafers per month, potentially yielding 700-1,000 semiconductor chips daily at peak efficiency.

In January, Tata Sons Chairman N Chandrasekaran announced plans for a ‘huge semiconductor fab’ in Dholera during an investment summit in Gujarat. This facility is set to commence operations in 2024, marking the first major chipmaking plant established by an Indian conglomerate and realising a longstanding ambition of New Delhi.

A semiconductor plant requires a $5-10 Bn investment.

The Tata Group proposal, along with Israel’s Tower Semiconductor, is one of two strong proposals currently with the government. Tower Semiconductor’s proposal involves an investment of nearly $9 Bn in India.

Besides the chip fabrication unit, Tata Group may soon reveal plans for an outsourced semiconductor assembly testing (OSAT) unit in Jagiroad, Assam, with a total planned outlay of approximately INR 25,000 Cr.

As per ET, Tata Group might seek a “knowledge partner” for the OSAT unit, as it does not necessitate very advanced and cutting-edge technology.

Meanwhile, in a bid to expand its iPhone manufacturing unit across India, Tata Group has been in advanced discussions with Taiwanese electronics major Pegatron to establish a joint venture for its second iPhone manufacturing facility in Tamil Nadu’s Hosur city.

Tata Group is preparing to construct one of India’s largest iPhone assembly plants in Hosur, aligning with Apple Inc.’s strategy to expand its manufacturing footprint in the country.

Tata currently operates a single iPhone assembly plant in Karnataka.

In November last year, the company completed the acquisition of Wistron’s manufacturing facility in the state, marking its foray into assembling Apple iPhones.

The post Tata Seeks For Taiwanese Collaboration For Guj Chip Plant appeared first on Inc42 Media.

Salt-to-software conglomerate Tata Group could be looking for collaboration with one of the two major Taiwanese semiconductor manufacturers...

20/02/2024

In a bid to trim expenses, troubled edtech giant BYJU’S has reportedly vacated a 400,000 square feet property at Prestige Tech Park in Bengaluru.

Earlier this year, the rental agreement for the 400,000 square feet property at Prestige Tech Park was terminated, adjusting the deposit to offset rent defaults, ET reported. Additionally, the company is facing ongoing disputes with several other landlords.

BYJU’S, which had been paying a monthly rental of approximately INR 4 Cr for the office space, had entered into a rental agreement with the Prestige Group about 3.5 years ago.

Meanwhile, Kalyani Developers has sent legal notice against BYJU’S for failing to pay rent for a 500,000 square feet office space located at Kalyani Tech Park in Bengaluru. Currently, the outstanding dues to the builder amount to ten months’ rent, of which BYJU’S has offset seven months’ rent with the deposit.

“We are leasing office space and always depend on our occupier’s business to flourish and grow. However, sometimes the headwinds of their own business make it difficult for them to fulfil their rental obligations. In this case, we tried our best to realign rents and give them some relaxation, Juggy Marwaha, CEO of Prestige Office Ventures, said.

When rental payments continued to be delayed, they had no alternative but to utilise the security deposit to cover the outstanding dues and formally request BYJU’S to vacate the premises, he added.

Meanwhile, think and Learn, the parent entity of BYJU’S, has reportedly secured a commitment of $300 Mn from investors for its ongoing rights issue, expected to conclude by February end. In January, BYJU’S initiated a rights issue to raise $200 Mn through equity rights, valuing the enterprise between $220-250 Mn.

Over the past two years, BYJU’S has grappled with a myriad of challenges, ranging from uncontrolled losses to business model obstacles, and conflicts with investors, along with legal disputes with creditors and vendors.

BYJU’S net loss surged 81% YoY to INR 8,245.2 Cr (close to $1 Bn) in FY22 as WhiteHat Jr and other loss-making acquisitions continued to weigh down the bottom line. In FY22, the startup’s total expenses nearly doubled to INR 13,668 Cr.

The post BYJU’s Trims Costs, Vacates 4 Lakh Sq Ft Bengaluru Office Space appeared first on Inc42 Media.

In a bid to trim expenses, troubled edtech giant BYJU’S has reportedly vacated a 400,000 square feet property at Prestige Tech Park in Beng...

20/02/2024

What Is Natural Language Generation (NLG)?

Natural Language Generation (NLG) is essentially the art of getting computers to speak and write like humans. It’s a subfield of artificial intelligence (AI) and computational linguistics that focusses on developing software processes to produce understandable and coherent text in response to data or information.

What Is The Difference Between Natural Language Generation & Natural Language Processing?

Both natural language generation (NLG) and natural language processing (NLP) deal with how computers interact with human language, but they approach it from opposite ends.

For instance, NLP focusses on understanding human language. It takes unstructured data like text or speech and converts it into a format computers can understand. This involves tasks like:

Named Entity Recognition: Identifying important entities like people, places, and organisations.

Part-Of-Speech Tagging: Classifying words according to their grammatical function (noun, verb, etc.).

Sentiment Analysis: Understanding the emotional tone of a text.

Machine Translation: Converting text from one language to another.

Natural language generation (NLG), on the other hand, focusses on creating human language. It takes structured data and converts it into natural-sounding text or speech that humans can easily understand. This involves tasks like:

Text Summarisation: Generating a concise summary of a longer text.

Question Answering: Providing answers to questions based on a given text.

Report Generation: Creating reports from structured data like financial statements or scientific results.

Dialogue Generation: Creating chatbots that can hold conversations with humans.

NLP and NLG often work together, as NLP can be used to prepare data for NLG, and NLG can use the results of NLP to generate more accurate and relevant text. Here are some more differences between the two technologies:

Focus: NLP focusses on meaning, while NLG focusses on form and fluency.

Input & Output: NLP takes human language as input and outputs structured data, while NLG takes structured data as input and outputs human language.

Applications: NLP has applications in areas like machine translation and sentiment analysis, while NLG has applications in areas like chatbots and report generation.

How Does Natural Language Generation (NLG) Work With AI?

Natural language generation (NLG) and AI are deeply intertwined, with NLG relying heavily on various AI techniques to achieve its goals. The following are some of the AI techniques used in NLG:

Machine Learning: This is the backbone of NLG, allowing systems to learn from massive amounts of text data and identify patterns. NLG models use machine learning to understand language structure, grammar and vocabulary, and then use this knowledge to generate new text.

Deep Learning: A specific type of machine learning, deep learning utilises artificial neural networks with multiple layers to process language more accurately and capture complex relationships within text. This enables NLG systems to generate more nuanced and human-like text.

Natural Language Understanding (NLU): This AI subfield focusses on understanding the meaning of human language. NLG systems often use NLU techniques to analyse the context of a situation and generate text that is relevant and appropriate.

Knowledge Representation: This involves encoding information in a way that computers can understand. NLG systems use knowledge representation to access and process relevant information from various sources, enriching the generated text with factual details.

AI also enables many of the capabilities NLG possess:

Personalisation: AI allows NLG systems to tailor their output to specific users or situations. This can be done by considering factors like user preferences, demographics and context.

Creativity: While NLG isn’t truly ‘creative’ in the human sense, AI helps it generate different phrasings, sentence structures and even narratives depending on the situation.

Fluency & Coherence: AI helps NLG systems produce grammatically correct text that reads naturally and flows logically.

Adaptability: AI allows NLG systems to learn and improve over time, adapting to new data and situations.

What Are Some Common Examples Of Natural Language Generation (NLG)?

The following are some of the several real-life applications of natural language generation (NLG):

Chatbots: AI-powered NLG allows chatbots to have more engaging and natural conversations with users, understanding their intent and responding in a relevant and personalised way.

News & Report Generation: NLG can automatically generate news articles or reports based on data, saving time and resources for journalists and analysts.

Personalised Marketing: AI-powered NLG can create personalised marketing messages that resonate with individual customers, leading to improved engagement and conversion rates.

Accessibility Tools: NLG can be used to convert complex information into simpler formats, making it accessible to people with disabilities.

The post Here’s Everything You Need To Know About Natural Language Generation appeared first on Inc42 Media.

What Is Natural Language Generation (NLG)? Natural Language Generation (NLG) is essentially the art of getting computers to speak and writ...

19/02/2024

Coupons and cashback app CashKaro’s net loss narrowed 25% to INR 11.1 Cr in the financial year 2022-23 (FY23) from INR 14.8 Cr a fiscal ago, helped by the addition of a revenue head from the sale of e-vouchers.

Founded in 2013 by Rohan and Swati Bhargava, CashKaro offers coupons, price comparisons, and deals to consumers, allowing users to earn cashback and rewards for shopping online across over 1,500 ecommerce platforms, including Nykaa, Amazon, Flipkart, Tata1MG and Myntra.

Its two main operating revenue sources in FY23 were from platform services and the sale of e-vouchers. The startup’s operating revenue grew 15% to INR 248.6 Cr in the reported year from INR 216.2 Cr in FY22. In this, INR 230.6 Cr came from its platform services while INR 18 Cr was from the sale of e-vouchers. In FY22, CashKaro did not earn any revenue from the purchase of e-vouchers.

Including interest income, excess provisions written back, and other non-operating income, CashKaro’s total revenue stood at INR 251.7 Cr in FY23 as against INR 217.8 Cr in the prior year.

In FY23, CashKaro also raised INR 130 Cr ($15.69 Mn) in its Series C funding round to strengthen its B2C engagement model and scale business. The round was led by Affle Global.

CashKaro is also backed by the likes of Ratan Tata, Kalaari Capital, and Korea Investment Partners.

Zooming Into Expenses

In line with its growing business, the startup’s total expenses increased 13% to INR 262.8 Cr in FY23 from INR 232.6 Cr in the year before with the addition of purchases of stock-in-trade as a new expense head.

Purchases Of Stock-In-Trade: CashKaro’s spending for the purchase of e-vouchers stood at INR 17.9 Cr in the year under review, which was zero in FY22.

Employee Cost: The startup’s employee benefit expenses witnessed a sharp jump of almost 50% to INR 29.3 Cr in FY23 from INR 19.6 Cr in the year before. Of this, INR 26.2 Cr was spent towards salaries and wages, a jump of 46.5% year-on-year (YoY).

Advertising Promotional Expenses: CashKaro’s ad expenses increased about 21% to INR 57.8 Cr in FY23 from INR 47.8 Cr a year ago.

Cashback: The startup’s spending on cashback comprised the biggest part of its expenses, which stood at INR 137 Cr in FY23. However, it was a 2.4% YoY decline from INR 140.4 Cr spent in FY22.

As per CashKaro’s website, the startup crossed the 20 Mn users mark in 2023. It has also paid over INR 700 Cr in cashback so far.

The post CashKaro Narrows Its Loss 25% YoY In FY23, Crosses INR 250 Cr Revenue Mark appeared first on Inc42 Media.

Coupons and cashback app CashKaro’s net loss narrowed 25% to INR 11.1 Cr in the financial year 2022-23 (FY23) from INR 14.8 Cr a fiscal ago...

19/02/2024

On January 31, 2024, the Reserve Bank of India notice related to actions on Paytm Payments Bank all but crippled one of the most celebrated startups in the country. The notice, which effectively banned PPB from operations, not only came as a rude shock to Paytm, but the fears are trickling down to the entire fintech industry in India.

However, Paytm somehow took control of the situation by shifting its nodal account to Axis Bank. In the detailed FAQs issued on February 16, the RBI clarified that Paytm QR codes, soundboxes and card machines will continue to be operational after the revised March 15 deadline (earlier February 29) only if the merchants migrate to other banks.

Undoubtedly, Vijay Shekhar Sharma-led Paytm Payments Bank has faced a tumultuous period in the last 20 days. However, it’s essential to note that this isn’t the first instance of the RBI rattling the Indian fintech realm.

More recently, the central bank directed an unnamed card network to halt all card-based business payments made via payment intermediaries to entities that do not accept card payments with immediate effect.

For the past two years, dozens of startups have borne the brunt of the RBI’s policies, which has now snowballed into an industry-wide debate. Concerns and questions are being raised about whether the compliance burden is worth it, especially because it takes up so much of the focus away from running the business.

Founders and investors are also questioning the RBI’s regulatory action in connection to Paytm, which means others in the fintech sector are left in the dark about whether they need to change their operations.

The Heavy Hand Does Not Justify The Grounds Of Proportionality

Some believe that various RBI’s regulatory measures (listed below) could have hampered over INR 2 Lakh Cr (a conservative estimate) worth of digital transactions and led to dozens of fintech startups shutting down, and millions of end-consumers losing their money.

Nikhil Pahwa, a tech policy expert and the founder of the news platform MediaNama, told Inc42, “Startups are inherently designed to exploit grey areas to scale rapidly. Excessive compliance greatly hinders their growth potential. In the fintech sector, a significant portion of the capital injected into companies to fuel rapid expansion and market capture has unfortunately been squandered due to certain RBI policies rendering their operations unviable or untenable from an investor perspective.”

Pahwa was one of the signatories to an open letter sent by noted investors and startup founders urging the RBI to explain its actions and revoke the bar on the Paytm Payments Bank.

Their feedback to the regulator has come after hundreds of fintech startups suffered significant setbacks due to RBI regulations. Several startups such as Coinome, Throughbit, Koinex, and Muvin were forced to cease operations following notices from the RBI, while others such as Slice, Jupiter, PayU, and Instamojo had to face business slowdowns due to one or the other reason.

As seen below, startups across stages and revenue scales, have had to bear the brunt of adverse regulatory action.

Many of these notices were issued by the RBI based on concerns and speculation in the market, leading to drastic measures.

For example, in April 2018, the RBI prohibited banks from providing services to crypto-based entities, citing speculation about how cryptocurrencies could potentially impact the Indian Rupee and end users negatively. This circular resulted in the closure of over 12 crypto entities within a year.

Two years later, the Supreme Court overturned this circular on the grounds of proportionality. In the subsequent circulars too, multiple founders argued that the RBI often lacks proportionality when dealing with fintech startups.

Another instance came on June 20, 2022, when the RBI directed all non-bank prepaid payment instruments (PPI) issuers to cease loading their payment instruments through credit lines.

This decision stemmed from concerns that many non-bank PPI issuers were competing with credit cards without meeting credit card compliance requirements. The RBI is said to have been monitoring this for about 18 months, but the final notice came all of a sudden, leading to many users being left helpless.

While there may be merits in the RBI’s arguments, what doesn’t sit well with fintech companies is the RBI’s unilateral approach, fintech founder said preferring to remain anonymous. “There were numerous ways the RBI could have acted without causing harm to many startups,” founde said about the past actions by the central bank.

Understandably, there’s a fear about talking openly against regulations, as this results in unwanted questions about whether a startup is indeed running afoul of the rules.

In the case of the PPI ruling, the belief is that the RBI could have allowed limited credit lines for existing players while prohibiting new players from issuing them.

Subsequently, the credit lines could have been gradually reduced. This approach would have enabled founders to explore other product options without being severely impacted by existing products, the founder added.

The Paytm Row Lacks Transparency

To be frank, everyone agrees that regulation is a must and all fintech startups must abide by the regulation. Inc42 spoke to over a dozen fintech founders, investors and tech policy experts and this was one of the key consensus points.

Early-stage VC firm Prime Venture Partners’ Sanjay Swamy said, “I have always maintained that there is no grey area in compliance, especially in fintechs – so the focus on compliance will be a lot more strict from now on; it’s simply non-negotiable.”

Paytm’s KYC measures, the payments bank’s association with Paytm, related party transactions, and opacity of wallet ownership have been questioned by many, but the fact is that RBI did not stop these before it became such a big issue, few highlighted.

For instance, Sucheta Dalal, a journalist who exposed the Harshad Mehta scam in the 1990s, said that the annual report of Paytm Payments Bank is not available separately, since it is a subsidiary or associate of One97 Communications (Paytm).

“SEBI disclosure rules don’t help. 58% held personally by the founder Vijay Shekhar, so how was it allowed to deal with such large public funds? Will the RBI and SEBI put out info for analysis even now or should we ONLY rely on pressers and leaks?” she asked.

The episode has hit the industry hard with investors rethinking their fintech investment strategy in the short-term or medium-term.

One of the biggest issues that fintech founders pointed out is the lack of transparency. “We are not questioning why the RBI took these measures, but how and for what exactly,” said a payments startup founder.

“Also, if a certain bank fails to meet the compliance within the given deadline. The RBI needs to interject with other instruments first such as a change of the directors, and appointing its director to make sure the bank becomes compliant among many other corrective measures. Why should the end consumers always suffer for the RBI’s regulatory inefficiencies?” asked the founder.

Besides publishing the circular, the RBI has been shying away from discussing the matter in detail. “Paytm Bank was given so much time. In our case, having initially secured a PA licence, it was later cancelled without any adequate time to find alternatives,” said another payments startup founder.

Interestingly, whether it’s the SBM India, Paytm Bank or in many other cases, the RBI has cited “Material Supervisory Concerns” to explain its actions.

In the latest Paytm row, the RBI had also added that the Comprehensive System Audit report and subsequent compliance validation report of the external auditors revealed persistent non-compliance and continued material supervisory concerns in the bank, warranting further supervisory action.

However, it didn’t reveal the magnitude of non-compliance that led to this scale of supervisory action to establish the very ground of proportionality.

This doesn’t help startups who want to abide by the compliances but often look confused and frightened when asked about regulatory issues and how they plan to tackle it, said an industry stakeholder.

Even Paytm founder and CEO Sharma could not delve into the exact issue in calls with analysts and claimed that the bank has been restricted from sharing more information with One97. It’s all a bit confusing at the moment, even for the company which has been hit the hardest.

Is Fintech Investible?

Investors are wary of the impact in the short and medium term.

As MediaNama’s Pahwa explained, “What’s happening in fintech is that after SaaS, this was the big bet for VCs in terms of trying to create a new industry and grow the market that now with a large number of companies faltering, and within ecosystem becoming very, very restrictive, because of RBI regulation, and especially with the scare that’s happening.“

Others claimed that VCs are going to be a lot more cautious about investing in highly regulated areas. It sends out a signal to founders about fintech having an entry barrier and it tells investors that exits and returns will not exactly come as expected.

“I think nobody will want to touch a domain where the RBI has a regulation,” Pahwa claimed.

The other worry is that this indicates that regulators are going to be very tight across sectors.

Despite the government’s claims, many believe that India has not really embraced ease of doing business. Dr. Somdutta Singh, serial entrepreneur, founder and CEO of Assiduus Global Inc, and angel investor, said, “These incidents prompt a reassessment of investment strategies, with a greater emphasis on due diligence and risk mitigation. While regulatory hurdles may necessitate adjustments in investment size and sector focus, the underlying potential of fintech remains compelling.”

Dr Singh added that prudent investors will seek opportunities in companies that demonstrate a commitment to compliance and resilience in the face of such regulatory challenges. It might result in VCs adjusting investment sizes or fine-tuning their sector thesis.

The fundamental role of a regulator is to safeguard consumer interests, setting guidelines that allow innovation to flourish without detrimental effects on the people that they aim to protect, believes Anirudh A Damani, managing partner, Artha Venture Fund.

“This understanding has been pivotal in our investment strategy, especially within the fintech sector, where rapid growth often treads a fine line with regulatory adherence. But recent actions serve as a reminder of the complexities inherent in navigating the fintech ecosystem. These instances highlight the essential nature of engaging with regulatory bodies, fostering an environment where innovation can proceed within the bounds of established rules.”

Among these cautionary tales, Swamy believes that there will be no slowdown in investments in the early stage fintech, because they can be more agile and adaptable.

Is RBI Even Equipped To Regulate Fintech?

MediaNama’s Pahwa believes that whatever growth has been seen by the fintech industry is in terms of lending or in terms of financial inclusion through wallets and UPI. He claims that a lot of this is not because of the RBI, but despite the RBI.

Kaushal Sampat, founder of risk management company Rubix Data Sciences, said that protecting consumers sometimes may seem contradictory to promoting financial innovation. Regulators have to constantly adapt their approach to reflect these diverse considerations and evolving markets.

The central bank is by design a regulator and it prefers to regulate banks and those entities that it can control tightly. Banks have a significant amount of compliance. And as such Paytm Payments Bank should also have had the kind of compliance that was required by the RBI, but fintech companies do not necessarily fall under the central bank’s purview.

Pahwa added that the RBI doesn’t like to regulate too many entities, such as thousands of fintech companies. “They would rather regulate a few banks, like maybe 50-100 banks, so they can keep tight control of this space. They don’t have the capacity or the willingness to really experiment or allow experimentation here. But that’s their basic nature. If companies struggle for licences and compliance, it makes it very expensive to start up in fintech.”

No one is claiming that the RBI’s focus on regulating the flow of money or anti-money laundering is not important, but there needs to be a middle ground and some ground of proportionality, say the stakeholders.

“To streamline their business processes, fintech companies are urged to use cutting-edge technology like cloud computing and data analytics. This helps them comply more easily and positions them to gain a competitive edge in the rapidly evolving market,” added Milan Sharma, founder and MD of Mumbai-based VC firm 35North Ventures.

While there is a fear currently of the regulatory hammer falling on the future of their business, startup founders are clear that creating the delicate equilibrium between safeguarding consumers and mitigating systemic risks is paramount.

The recent strategy adopted by the RBI focuses on licensing and heightened supervision, steering fintech products toward conventional regulatory channels. If this is the new reality then startups will find a way to innovate within this sandbox.

But it’s when actions come out of the blue, that fintech startups get spooked. And that’s why perhaps many believe that the RBI needs to share authority with new-age regulators to determine the future of fintech.

The post RBI Vs Paytm Payments Bank: Shockwaves In India’s Fintech Ecosystem appeared first on Inc42 Media.

On January 31, 2024, the Reserve Bank of India notice related to actions on Paytm Payments Bank all but crippled one of the most celebrate...

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