Cover Story

Published: Dec 29, 2021
Updated: Dec 29, 2021

Paytm Conundrum: Will Sebi Wake Up?

POST the huge slump in the listing value of Paytm shares following its record Rs 18,300- crore IPO, the focus of all right-thinking investors and market watchers is on the supposed regulator of the Indian capital market, SEBI, which many see as 'guilty by association' in the fiasco.

The crux of the concerns being voiced is how SEBI could allow the tech company's bankers to fix a sky-high price of Rs 2,150 per Re 1 share. It is crystal clear that the market watchdog was sleeping on its watch as the company's over-reaching bankers paved the way for the listing fiasco that followed.

According to financial expert Dr VVLN Sastry, Paytm's post-IPO flopshow can be traced to a combination of overpriced listing, low profit prospects, future uncertainty, UPI competition and cultural differences between investors. Needless to say, the 'casino culture' of booking profits immediately on listing must also share some of the blame for such fiascos which only serve to drive away genuine investors from the market.

The disastrous debacle of the Indian capital market's largest IPO so far, the Rs 18,300-crore issue of Paytm, owned by One97 Communications, has raised certain fundamental questions which concern core issues related to the Indian capital market. Let us examine these questions:

• How did Paytm and its investment bankers/merchant bankers get the green signal from the so-called regulating authority of the capital market - Securities and Exchange Board of India (SEBI) -- for an unheard-of and sky-high price of Rs 2,150 per share of the face value of Re 1, that too for a company which is a non-profit making entity? SEBI is supposed to have been created to protect the interests of investors. By giving a green signal for such a fantastically high premium, has SEBI served the interests of investors or the promoters and their merchant bankers?
• What should be the ideal role of an investment banker? By working out a sky-high IPO price 2,150 times the share's face value, which formula did they apply? What is the rationale behind fixing such a fabulous IPO price? Should SEBI entertain such merchant bankers? Should they be allowed to managed an IPO? After all, a merchant banker is the pivot around which the entire IPO revolves! Well, okay, one can cut some slack for SEBI and say that 'by mistake' it gave the green signal to such a high- priced IPO. But post the debacle, should not the market regulator demand an explanation for the fixing of such an exorbitant price?
• Of late, the IPO market has become a casino-like exercise. Has SEBI taken note of this phenomenon? Whatever may be the premium, investors rush in to subscribe to the IPO and sell off their allotted shares on the very first day of listing! It needs to be remembered that the new issue market is an exercise to promote and strengthen the equity cult in India, and is essential for growth of capital formation in the country which in turn can give a push to industrial development of the country! Do IPOs like Paytm further any of these objectives?
• What could be the impact of such a debacle on the Indian capital market? Some experts like Gopal Agrawal, Managing Director and head of investment banking at Edelweiss Financial Services, have gone on record maintaining that such an IPO debacle with a weak listing will nudge investors to be extra cautious and not take the market for granted by blindly placing bets! In other words, this means that investors will start giving more importance to the fundamentals of a company and its prospects rather than merchant bankers' recommendations!
• Have SEBI and the merchant bankers considered that the Paytm debacle will adversely affect the prospects of future IPOs of new tech start-ups? Or that even genuine issues being offered at a reasonable price will meet with failure?
• Has SEBI learnt anything from this debacle? Will it change its policies and attitude towards fixing the proper price for an issue in the future? In short, will it think in the interests of investors? How will SEBI decide whether an issue is properly valued or overvalued? Or will it go by what merchant bankers decide?

THE ANSWERS AWAITED

Honest and clear answers to these inter-related questions will go a long way in shaping the future of primarily the capital market in the country. After all, Paytm was the largestever public issue involving a humongous Rs 18,300 crore and the offer price was Rs 2,150 per piece of the face value of Re 1. Much to the surprise of all - SEBI, merchant bankers and investors -- the digital payments major crashed on listing and lost around 28 per cent, eroding the investment value of the investing public which was expecting huge gains on listing. The price has now gone down to Rs 1,600! That is not all. Paytm's shares touched the lower circuit, the minimum price to which a stock is allowed to fall, in the second half of the day of listing. As opposed to the $ 20 billion valuation that Paytm was aiming for, its current valuation stands significantly lower at around $ 16 billion!

MODI FACTOR?

Of course, there were reasons as to why there was excitement among the investing public over the PayTM IPO. First of all, of late the stock market has turned distinctly bullish with all popular indices, including Sensex and Nifty, reaching all-time high levels unheard of in the past. There is a widespread impression in the market that the Modi government wants a bullish market to sustain, as a booming stock market attracts more foreign investment. The Reserve Bank also resorted to a low interest regime, giving a big push to market prices. In the process, the IPO market also turned distinctly bullish and started showering huge gains. New-age tech start-ups like Zomato and Nykaa showered fabulous profits on their investors.

On one side there has been a tremendous rush of newage tech IPOs keen to mobilise funds from the market and, accompanying it, a mad rush among the investing public to blindly place bets and encash profits on listing. This craze for easy money reached new heights as the stock market experienced spectacular rallies, creating an ideal environment for several new-age tech startups to go public and more and more investors to rush for subscribing to IPOs.

As it is said that anything in excess is poison, the stock market and the IPO segment could not be saved from this phenomenon.

Analysing the Paytm issue debacle, Dr VVLN Sastry, an erudite financial economist, comments, "The year 2021 has been a landmark year for India's IPOs. Many unicorn companies have risen on the stock market wave -- Nykaa, Zomato, Paytm, etc. Unlike Nykaa, which had a blockbuster debut and became a historic success story, others failed to live up to their potential." An example of this is Paytm's failure on the stock market. In what was India's largest-ever IPO, Paytm raised $2.46 billion (Rs 18, 300 crore).

The shares were priced at Rs 2,150, and everything appeared to be going smoothly until the day of trading, but the share price crashed dramatically on the opening day. Investors of Paytm ended the trading session with a 27.24% decline in share price. The dramatic decline continued for a second day, inflicting almost $900 million in investor losses within two days.

Paytm was questioned by investors about its lack of profits and its lofty enterprise value of 27 times the gross profit. Its price fall shocked many and reduced its IPO valuation by $5 billion. Paytm's successful IPO and subsequent failure on the listing have made headlines in India. Introspection has commenced on what exactly caused such a massive failure in such chaos and confusion.

OVER-VALUED

According to Dr Sastry, "Paytm's massive IPO failure can be traced to five factors: overpriced listing, low profit prospects, future uncertainty, UPI competition, and cultural differences between investors. Since the IPO was offered at a much higher valuation than the actual company valuation, the company suffered market losses as a result. Paytm's parent company, One97 Communication, traded at 49.7 times its FY21 revenue.

"The lack of a licence to operate in the lending business is one of the significant factors contributing to distrust. All fintech companies make the most money from their lending divisions. Therefore, a financial services company must have a lending component to be in the good books of investors. Paytm, however, does not have a licence to enter this fintech market segment.

RIVALS CLOSING IN

"As one of the biggest success stories of the last decade, Paytm has now been outperformed by its competitors. Paytm is facing intense competition from big sharks, which have a better track record of success. Consumers are increasingly switching to UPI payments for easy direct bank transfers. PhonePe, which represents 42% of all UPI transactions in the country, is the biggest threat to the company. BHIM and Google Pay are other big names in the industry. Paytm's future in this segment is directly impacted by PhonePe and Google Pay, which together account for more than 82% of the UPI market in India."

Dr Sastry believes that "the Paytm listing is also affected by cultural differences among investors. In comparison with Indian investors, foreign investors have a higher appetite for stock market risks. India's market is driven by profitability and earnings -- segments where Paytm has no chance." All things considered, the golden phase of IPOs in India appears to be over for the moment, as Paytm's shares fell on debut on November 18. In the wake of this unexpected turn of events, there has been debate over whether it will impact upcoming IPOs, including Life Insurance Corporation of India, MobiKwik and OYO.

One school of investors believes that capital markets are driven by sentiment, which will adversely affect upcoming IPOs, while the liberal school believes it will have little effect.

In the short run, IPO valuations will cause investors to be cautious, negatively affecting the market. However, this will not affect the entire market. Those companies that will not be adversely affected are those with solid growth rates, reasonable valuations compared to global players, and already profitable or looking to be profitable soon.

Eventually, this may not matter since the market and investors will still favour new economy companies. Investing in new-age companies will require investors to reexamine their expectations and expect no instant earnings. The companies with high cash burns who intend to go public will look to give realistic valuations in light of the Paytm debacle and adopt a conservative approach to profitability. Maintaining that "since startups have been raising large amounts of equity from private equity and venture capitalists at exorbitant valuations for the past few years, aiming to capture marketshare at the expense of revenue and profit, Paytm's failure at the IPO should serve as a reminder that the business model should be sound and defendable," Dr. Sastry adds, "In addition, the IPO should be priced reasonably and should leave money on the table for incoming investors. Investors too must educate themselves on valuations before investing in any IPO, rather than crying foul subsequently after investing."