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Paytm IPO key risks: From history of losses, ownership case, foreign control to COVID-19 impact

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Paytm IPO is set to be launched on November 8. Here’s a look at some of the key risk factors listed by Paytm in its draft red herring prospectus (DRHP)

Paytm IPO key risks: From history of losses, ownership case, foreign control to COVID-19 impact
Paytm IPO is all set for a post-Diwali launch. The bidding for the three-day, whopping Rs 18,300 crore initial public offering (IPO) of One97 Communications, the parent entity of the digital payments firm, begins on November 8.
Increased on the back of investor demand, the company’s new total IPO size includes a fresh issue of equity shares worth Rs 8,300 crore and an offer for sale (OFS) worth Rs 10,000 crore by existing shareholders. These include founder Vijay Shekhar Sharma, Ant Financials, Alibaba, Elevation Capital, and SAIF III Mauritius Company, Saif Partners.
Paytm is looking at a valuation of about $20 billion following its listing on the bourses. Founder Sharma has said that the digital payment and financial services platform may not need more capital beyond the IPO fundraise unless in extraordinary circumstances.
Paytm IPO, however, is not devoid of risks, be it the company’s history of losses, negative cash flow, its foreign control and ownership, or the litigations against it.
Here’s a look at some of the key risk factors listed by Paytm in its draft red herring prospectus (DRHP)
History of losses: Paytm has incurred net losses, including a Restated Total Comprehensive Income/(Loss) for the Period / Year including discontinued operations of Rs 42,355 million, Rs 29,433 million, Rs 17,040 million, Rs 2,881 million and Rs 3,766 million in FY 2019, FY 2020 and FY 2021, and in the three months ended June 30, 2020 and 2021, respectively.
“We expect to continue to incur net losses for the foreseeable future and we may not achieve profitability in the future,” the company has stated in its DRHP.
COVID-19: According to Paytm, the ongoing pandemic and measures intended to prevent its spread have had, and may continue to have, material and adverse effects on its business and the results of operations.
Group companies: Paytm offers some of its services in partnership with Group company Paytm Payments Bank. Any failure by Paytm Payments Bank to support services could adversely impact services and overall business, financial condition and results of operations, the firm announced in its DRHP.
Relationship with merchants: If Paytm is unable to attract merchants to its ecosystem, grow relationships with existing merchants, and increase transaction volumes on its platforms, its business, results of operations, financial condition, cash flows and prospects could be materially and adversely affected, the company said.
Lawsuits: There are pending litigations against One97 Communications, its subsidiaries, and certain directors. Any adverse decision in such proceedings may adversely affect business, cash flows and reputation.
One of the cases in which Paytm is involved is its ownership case. A former Paytm director Ashok Kumar Saxena has claimed he co-founded the digital payment platform two decades ago but did not receive shares owed.
His complaint filed with the Delhi Police is cited under “criminal proceedings” in Paytm’s prospectus. Paytm has denied the allegations and clarified that there was no such definitive agreement and nor was there any misappropriation of funds.
Foreign ownership: Paytm is and after the IPO will remain a “foreign-owned and controlled” company in accordance with the Consolidated FDI Policy and FEMA Rules. Accordingly, it will be subject to Indian foreign investment laws.
“While we believe that our business activities have been, and continue to remain, compliant with the requirements under the Consolidated FDI Policy and other Indian foreign investment laws, we cannot assure you that the Government, or a regulatory or judicial authority, will not take a different interpretation,” Paytm’s DRHP read.
Negative cash flows: The digital payments platform says it has had negative cash flows from operating activities for FY 2019, FY 2020 and FY 2021, and in the three months ended June 30, 2020 primarily due to operating losses and additional working capital requirements.
Technological challenges: The failure to maintain or improve technology infrastructure can harm our business and prospects, Paytm has said in its DHRP.
Insurance: “Insurance companies in India and other jurisdictions in which we operate may offer limited business insurance products. As a result, we may not be able to acquire any insurance for all types of risks we face in our operations in India and elsewhere, and our coverage may not be adequate to compensate for all losses that may occur, particularly with respect to loss of business or operations,” the firm said.
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