No. Vijay Shekhar Sharma's Resignation Will Not Save Him

Vijay Shekhar Sharma (VSS) is a man of grand announcements. Many critical moments in his life—starting one of the earliest payments banks in the country to receiving funding from legendary investor Warren Buffet—were all marked by loud proclamations of ambition and aplomb. But as he lives through one of the most decisive moments of his entrepreneurial career, wherein he seemingly cedes control of the payments bank that was the cornerstone of his fintech universe, the Paytm founder prefers the silent way out.

On February 26, One97 Communications (OCL), the listed entity behind the popular Paytm payments application, disclosed to the stock exchanges that its payments bank arm underwent a major rejig of its decision-making body. “OCL withdraws its nominee from the Paytm Payments Bank board and Vijay Shekhar Sharma steps down as part-time non-executive chairman and board member,” it said.

For those who have followed the Paytm saga, it is common knowledge that Paytm Payments Bank (PPBL) was the defining feature that helped Paytm become a leader in India’s financial technology landscape. Paytm’s popular wallet business was housed within PPBL, and the in-house payments bank allowed Paytm to cut down its dependence on third-party banks in key segments of its digital payments pipeline.

Under the ambitious leadership of VSS, it did not take long for “Paytm karo” to become the slogan of a rapidly digitalised payments market in India. But its penchant for cutting corners and chasing quick growth meant that VSS’s fintech empire, specifically its payments bank entity, attracted close scrutiny from the Reserve Bank of India (RBI).

The stepping down of VSS from the payments bank’s board is, in fact, a silent acceptance of the many offensives fired by the central bank at PPBL, the latest and most significant of which came in January. On January 31, the banking regulator prohibited PPBL from accepting any customer deposits, top-ups or credit transactions, effectively sounding a death knell for the payments bank.

The central bank took this harsh measure because, despite multiple warnings, the flow of data and money between PPBL and the rest of the Paytm universe was flouting regulations and creating accounting hurdles. With the latest series of changes in the PPBL board, along with the announcement that the search party is out for a new chairman, VSS is attempting to create an “arm’s length” between PPBL and OCL—a long-standing demand of the RBI.

Along with the exit of VSS, the PPBL board also saw the departure of Bhavesh Gupta and Srinivas Yanamandra in the latest rejig; both hold top positions in OCL. The newly constituted board consists of five independent directors besides the payments bank’s managing director and CEO Surinder Chawla. Notably, all the independent directors are either former bureaucrats or those with decades of experience in public sector banking. In contrast, PPBL’s board prior to the RBI’s January strictures was dominated by those who are presently, or were formerly, associated with Paytm.

“The question to ask is whether this [change in board composition] was voluntary or did the RBI nudge the company to make these changes. Let us wait and see how much of the changes and actions will be driven by the explicit directions of the RBI,” says Amit Tandon, founder and managing director at Institutional Investor Advisory Services (IiAS), a proxy advisory firm.

Road Ahead for VSS

VSS stepping down is unlikely to cut ice now with an RBI so miffed that, in an uncharacteristic outburst, the regulator has clarified that “there is no scope for review”. While PPBL will always have multiple options for a reconsideration, chances of success are slim.

VSS’s resignation from the position of part-time chairman will not solve PPBL’s problem, say multiple bankers both retired and active while speaking to Outlook Business. 

“A bank’s job is to protect customer data privacy. The moment there is scope to question the quality of client confidentiality, the bank has lost its ethical stand. So, when the RBI is questioning PPBL’s KYC [know-your-customer] guidelines, a resignation here and a new chairman appointment there is unlikely to appeal to the RBI,” former finance secretary to the government of India R. Gopalan tells Outlook Business, crystallising what multiple other sources revealed to us. 

Paytm is no different from other controversy-stung start-ups where the main concern was the quality of management. Like all cases, the founder is at the centre of it and unable to extricate himself from the process of decision-making. “The only salvation of PPBL lies in VSS removing himself from the Paytm universe,” says a source close to the developments. “With the majority stake remaining with VSS, his power over the board will not diminish. So, he is the proverbial elephant in the room,” says another source in the thick of things.

With the power of a banking licence comes great responsibility and VSS has perhaps understood its weight only after the RBI’s diktat on January 31. RBI rules and their compliance are all part of the wide web of regulations and mandates that govern money movement across India and foreign transactions through banks. So, when a bank’s KYC is compromised like in the case of PPBL, it means the payments bank has failed to comply with its reporting to the Financial Intelligence Unit (FIU—a body under the finance ministry of India), a mandate as part of India’s Financial Action Task Force (FATF) membership. 

“KYC irregularities are massive banking regulation issues. Banks have an obligation to send regular reports to the FIU to help them spot any irregular transactions; this is part of the global effort to combat terror financing. So, if PPBL is flouting KYC norms, then what is the sanctity of their reporting?” asks Gopalan.

At the centre of this RBI-PPBL faceoff is VSS. So, he stepping down from PPBL while still holding 51% stake is likely to be seen as mere tokenism. The remaining 49% is held by OCL. “There are a series of decisions such as equity dilution, borrowings, director appointments and related-party transactions that will require shareholder approval. While he is not on board, Vijay Shekhar Sharma can still exercise control [over PPBL],” says Tandon of IiAS.

The story from the other side, the board members of OCL share, is in stark contrast to the commonly painted picture of a petulant VSS ignoring RBI’s repeated warnings.

“Since 2018, at every stage Paytm assured us that there is nothing to worry and the company is working closely with the RBI to resolve the concerns raised by the regulator,” says a former OCL board member. “In fact, some of us were also given the impression by RBI functionaries that they were happy with the progress made by Paytm,” says a source in one of the funds invested in OCL. But something has gone drastically wrong in the past one year for the RBI to take such a harsh stand against one of India’s most celebrated unicorn founders.

RBI Runs Out of Patience

VSS is no stranger to warnings from the RBI—having received four of them against PPBL to date.

The first warning came less than a year after PPBL commenced operations, asking the payments bank to temporarily halt the opening of new accounts in June 2018. This was due to violations of licensing conditions, including non-compliance with KYC guidelines and end-of-day balance.

Following a change of leadership at the RBI in December 2018, when Shaktikanta Das took over the reins from Urjit Patel, the ban on PPBL from onboarding new users was rolled back. However, PPBL continued to run into compliance issues with the central bank, racking up multiple penalties in the process.

The payments bank was fined Rs 1 crore for violating provisions of the Payment and Settlement Systems Act in June 2021. The central bank then observed that “PPBL had submitted information which did not reflect the factual position” in its application for a certificate of authorisation from the regulator.

Just two years later, in October 2023, the RBI again fined PPBL Rs 5.39 crore for non-compliance relating to KYC norms, licensing guidelines and cyber security framework under the Banking Regulation Act. This time around, the central bank imposed monetary penalty after conducting a special scrutiny of PPBL from an anti-money laundering perspective.

The payments bank was also required to undergo a comprehensive system audit by auditors identified by the RBI. The audit revealed that PPBL was non-compliant on various fronts: from breach of the regulatory ceiling on end-of-day balance to delay in reporting cyber security incidents, among other issues.

There is consensus among experts that the RBI is a conservative regulator not just with new age fintechs but also with traditional banks. However, there has been a remarkable difference between most traditional banks and a fintech like PPBL when it comes to handling RBI diktats.

“The regulator’s job is not to go and kill companies and kill entrepreneurs. That is not how they operate. At the same time, if there is impunity and there is arrogance in the way compliance is being managed, then the regulator also reserves a right to make an example,” says Rishi Agrawal, co-founder and CEO at TeamLease Regtech, a compliance-management software company. 

He points to the fines imposed by the RBI on Kotak Mahindra Bank and ICICI Bank in October 2023. “You did not hear a lot of hue and cry back then because the companies realised that these are issues in their internal systems and took them in their stride instead of taking the public outcry route,” says Agrawal.

In hindsight, it appears only natural that the RBI had to turn up the heat on PPBL when VSS refused to clean up the firm’s regulatory mess. That is exactly what happened in January this year.

The persistent nature of PPBL’s nonconformity points to a mismatch between the central bank’s vision for payments banks and VSS’s grandiose ambition to disrupt the digital banking space. “At the end of the day, the RBI gave him [VSS] a very narrow banking licence, just a payments bank licence. He combined the payments bank with the UPI, with the lending, etc. So, he was, in all acts and deeds, behaving like a universal bank,” says Tandon, of IiAS.

“It is just a question of what the RBI expected him to do and what Vijay Shekhar Sharma thinks he has been licensed to do. And clearly, there was some disconnect,” he adds. The result of this disconnect is that VSS now faces an uphill task with not many backers around him.

The Hustler

The eternal hustler, VSS has always been in a hurry to onboard customers and merchants. While many cite the eternal problem of start-up founders always being pushed to the brink to show scale, insiders point fingers at how third-party vendors were onboarding users. “Multiple merchants would be signed up on a single Aadhaar card! What to do? There were very steep targets and vendors operated in manners that were not always above board,” says a former employee at Paytm. 

Over the years, there have been multiple questionable incidents at Paytm that have seemingly escaped scrutiny from the company’s board. Tandon lists out two instances when his firm advised caution since Paytm went public. One was in August 2022 when the proxy advisory firm raised a red flag over the reappointment of VSS as the company’s CEO, and his remuneration. It noted that he had made several commitments in the past to make the company profitable, which had “not played out”. 

Later, in January 2023, IiAS also questioned VSS’s eligibility to receive stock options in the company since his aggregate stake in the company, including that under the name of his family trust, was above the threshold set by Paytm’s own employee stock ownership plan.

“Our own view is that while the governance in the listed space has improved notwithstanding the periodical blowouts you have, I still consider Paytm and that whole start-up universe to have potentially very weak governance. The private equity is not able to exert sufficient control or checks and balances over what the founders are doing,” says Tandon. 

Another aspect of his leadership that has raised the eyebrows of those in the corporate world is how VSS went about top-level appointments. When PPBL commenced operations, VSS did not see the need to bring in someone from the banking industry. “The CEO of a financial services company should ideally be an ex-banker or ex-RBI, who understands the industry and its nuances. But OCL promoted Renu Satti, who was from the company’s HR department, as CEO,” recalls Ravi Teja Gupta, a former PPBL zonal head at Hyderabad.  

Satti, a long-time confidante of VSS who started out in the fintech firm in a human resources role, was vice president of business at Paytm before she was asked to lead the payments bank.  

Responding to allegations of Paytm’s failure to implement corporate governance guidelines as its top management professionals lacked the requisite experience in banking and financial services, the company stated, “We would like to stress on the fact that Paytm has consistently implemented strong corporate governance across the management level.” 

“VSS’s biggest issue is that he does not have the management bandwidth to comply with regulations or establish the right processes. He is a great product thinker and developer and visionary, which is indisputable. The lack of a coherent management structure was the big issue,” says a senior executive in a fund invested in Paytm. Former employees who spoke to Outlook Business also concur. The centralisation of decision-making at VSS’s door had long been noticed and had become an eyesore for the RBI. 

When it comes to questionable practices at Paytm, many still remember the Sonia Dhawan episode. Dhawan was a former vice president of corporate communication at Paytm and, after eight years there, she was arrested in October 2018 when Ajay Shekhar Sharma, senior vice president at Paytm and VSS’s brother, filed a case against her, her husband and another Paytm staff member for allegedly stealing private company data and trying to extort Rs 10 crore from VSS.  

In a strange turn of events, she rejoined Paytm in September 2019 after having spent five months in jail. After a short second stint in Paytm’s gaming arm First Games, she joined SAIF Partners, an early backer of Paytm, which was rebranded as Elevation Capital in 2020. She is now with Paytm again, though her LinkedIn profile makes no mention of it (as verified by Outlook Business in February before going to print). Paytm did not find it necessary to issue any clarification when it decided to go public. The draft red herring prospectus filed by OCL with the exchanges did not mention any instances of past theft of private company data. 

It is now widely acknowledged within the investor community that Paytm went ahead with its IPO in a rushed manner, without having proper systems in place to function as a listed entity. “Amongst the very small bucket of new age companies that are listed in India, Paytm has emerged as the most glaring example of something going bad,” says the executive quoted above. By going public, and thereby being held accountable by the shareholders, the company found itself in a corner without any escape from the pressure being mounted by its investors and the regulator. 

VSS is the quintessential start-up founder, hustling for the proverbial another day. But will he see another? 

A Lonely Fight 

Soon after the RBI’s restrictions on PPBL’s operations became public, news also broke out that two independent directors resigned from the board of the payments bank. To address the growing concerns around compliance lapses at PPBL, and the payments bank’s failure to operate at an arm’s length from its parent entity, VSS set up a three-member group advisory committee to strengthen corporate governance matters within Paytm. A request for proposal from external auditors was also floated since past audits have already flagged supervisory concerns.

The advisory committee will be headed by former Securities and Exchange Board of India chairman M. Damodaran, and includes Mukund Chitale, former president of the Institute of Chartered Accountants of India, and Ramachandran Rajaraman, former chairman and managing director of Andhra Bank. However, some argue that the action is too little and too late because corporate governance issues at Paytm are not something new. 

“The three-member advisory team is not for execution; they will only advise. I do not think there is a dearth of advice in the market. While this is a step in the right direction, it is a reactive response to a regulator’s harsh penal punishment. I just wish that other financial institutions which are similarly funded and are catering to similar interest realise that the regulator in India cannot be taken for granted,” says Agrawal of TeamLease Regtech. He also adds that the development at Paytm holds lessons for other new age companies. Agrawal says, “The sooner other corporate heads realise the need to play by the rules, especially the younger breed of entrepreneurs who have come up on the stage and suddenly got into the limelight with $1 billion valuations, the better.” 

With the RBI having run out of patience with PPBL, what could possibly be the next turn in this saga? According to sources on D-Street, Paytm’s payments bank business may attract bids from well-known corporates but only if the shadow of VSS from it is removed. An impossible solution for the founder. 

The Wannabe Banker

For those who have followed VSS and Paytm long enough, it was clear that getting the payments bank licence was a major differentiator for the company in its payments business. With its popular wallet feature housed within its in-house payments bank, Paytm knew that it had something unique that other payments services like PhonePe and Google Pay did not possess.

While PPBL could not undertake lending activities on its own, Paytm’s business partnership with third-party lenders allowed it to disburse loans, along with cross-selling of other financial products on its platform.  

Even though Google Pay and PhonePe continue to dominate the UPI payments space, with Paytm settling for just 13% market share, its success in cross-selling financial products helped it establish its own moat. In the last quarter of 2020–21, revenue from the payments business accounted for 71% of OCL’s overall revenue. This has come down to 59% in the third quarter of 2023–24. During the same period, the share of revenue from financial services increased from 5% to 21%. 

Paytm’s lending partners disbursed over four crore loans through the company’s platform in 2022–23, a 163% growth over 2021–22, showing the platform’s knack for quick growth in financial services. In terms of value too, the loans grew 364% to Rs 35,378 crore in 2022–23, a huge uptick from Rs 7,623 crore in 2021–22. 

VSS was always confident that he could take on traditional banks with his tech-reliant business model. While brick-and-mortar banks that have universal banking licences had to deal with a variety of costs, Paytm could do away with some of it by virtue of its technology stack. “Traditional banks can do nearly everything that we can but, we have built our business bottom-up without any obligation of cost that the banks are built with,” VSS told Outlook Business in 2018. 

If PPBL had not run into regulatory concerns with the central bank, it could have applied for a small finance bank (SFB) licence by May 2022 as it completed five years of operations as a payments bank. An SFB licence would allow PPBL to lend to its customers from its own book, without depending on any other lending partners.  

VSS’s dreams of acquiring an SFB licence, and eventually a universal banking licence, reek of the same ambitious spirit that saw him script a rags-to-riches story in the first place. From earning around Rs 10,000 when he was 27 years old, VSS took inspiration from his hero Jack Ma of Alibaba Group to build Paytm into a household name in India. 

Just like Ma, VSS too wanted to build a world-class platform that would offer a host of commercial and financial services in a single place. Between November 2017 and December 2023, Paytm application downloads on Google Play Store increased from 10 crore to 50 crore, as per data from AndroidRank, an open Android market data tracking platform. But unlike other sectors where Paytm has tried its hand in the past—customer lifecycle management, target marketing, outbound dialling services, ecommerce, event booking and cloud services—the banking and non-banking financial sectors are fraught with very strict regulations. 

The Cult of VSS

Among the marquee investors in Paytm, Japan’s SoftBank Group has played an important role in the huge leap in Paytm’s valuation over the years. When the technology investor group invested $1.4 billion in Paytm in 2017 to gain a 20% stake and a position on the board, the fintech’s valuation doubled to an estimated $10 billion. But after Paytm’s disastrous IPO in 2021, SoftBank has gradually reduced its stake from about 18% to less than 4% now. 

“There was an issue with VSS in terms of his management style. That is the issue with cult founders because the company centres around his charisma or personality and this has a disproportionate influence on the way the company is formed or operates. Some manage well, Elon Musk managed to get away with managing Tesla, while others have fallen by the wayside,” observes a source in a marquee investment firm. “VSS is right now struggling; his entire business revolves around him. His management style was a one-man show,” he adds, explaining why decision-making remains centred around VSS and why this is irking RBI. Regulators the world over have had little patience with cult founders blowing governance to the wind. 

Despite being a publicly listed company for more than two years, Paytm is yet to completely shed its image of a young, fast-growing start-up. While this perception alone is not much of a problem, its refusal to govern itself in a manner expected of listed companies is at the root of the challenges it faces today. 

Agrawal of TeamLease Regtech says that Paytm’s failure to comply with regulations was not because of any technical deficiency but because of an attitude problem. “Some people have the attitude that jab hoga tab dekh lenge abhi toh grow karo [we will see about it when the time comes, prioritise growth for now],” he says, referring to the attitude towards regulatory risk. 

The growth-at-all-costs approach at Paytm is also attested to by former employees of the firm. Gupta, PPBL’s former Hyderabad zonal head, says, “For Paytm, speed is more important than the direction, which means they are not bothered whether they are doing right or wrong. That is how some start-ups work. Even if they make a single mistake in banking, it is a big thing, it is a crime. Paytm, as a company, they never cared about the RBI guidelines.” 

Die Another Day 

At a Paytm office party in 2017, VSS proclaimed in a state of inebriation: “Jo hamare saath nahin, wo royenge, ek saal me wo kiya jo unhone 10 saal me nahin kiya! [Those who are not on our side will end up crying, we achieved in one year what others could not do in 10 years!]”  

It is not hard to fathom where VSS got his confidence from. After all, he did successfully build a start-up that found backing from leading names in the world of technological innovation such as Alibaba Group and SoftBank Group. He also became the country’s youngest billionaire at that point, reaping dividends off the wide acceptance Paytm gained after demonetisation.  

But this quick growth came with its own risks. “The problem started cropping when the scaling up was considerable and Chinese geopolitical issues forced them to go public in a bid to give exit to Chinese stakeholders. Hypergrowth led to increased visibility and scrutiny too,” says Amit Gupta, director of practice growth at Factoryal, a boutique investing firm.  

Alibaba and Ant Financial, which had invested $851 million in Paytm since 2015, also divested their stake worth almost $1 billion in the company in three tranches last year, after the IPO. As per NSE filings in January 2023, Alibaba sold about 3% stake for $125 million, cutting its holdings from 6.26% in Paytm. A month later, it sold its remaining stake for about $167.14 million through a block deal.  

Ant Financial currently holds less than 10% stake in the company. However, PTI reported that government agencies are now investigating foreign direct investment from China in PPBL via Ant Group.  

Despite Paytm’s disastrous debut at the bourses, VSS remained confident. He remarked later in the day that the slump in share price was no indicator of the company’s value and that Paytm will execute its long-term vision.  

This optimism did not play out the way VSS and OCL willed; the share price never went up to the levels he would have expected, with the biggest crash coming with RBI cracking the whip. 

The regulator had extended VSS a long rope to get PPBL’s house in order, but he kept burning both ends—trying to chase high valuations without a second glance at compliance while believing that he would never fall afoul of the power corridors. 

However, the central bank has shown him that it was tired of playing the cat-and-mouse game on compliance and regulation and that no entity, however big, and no entrepreneur, however popular, is indispensable.  

The rockstar founder is finally caught in the one place he never thought he would land up in—unwanted in his own company. Like the mythical Icarus, VSS did not heed advice or warnings, flew too close to the Sun and came crashing down.