Paytm has had a torrid time at the stock markets, and been regularly been pulled up by the RBI for regulatory violations, but it now appears to have an become an example of just how poor a financial entity’s internal controls can be.
SEBI Chairperson Madhabi Puri Buch has said that SEBI will now allow a “Paytm type contamination” in the capital markets. “We won’t allow a Paytm-type of contamination in our market,” she said at an event organized by ET Now. “We all saw what happened (with) Paytm. Now because in the banking system there is no KRA-type (KYC Registration Agency) system, so a problem of Paytm stays (within) Paytm. It doesn’t contaminate other banks. But if we allow Paytm to come into our system, and there is no KRA, it contaminates the whole system. How can we allow that?” she asked.
“We cannot allow that,” Buch continued. “So we will always have our KRA sitting in the middle to make sure things are validated. Otherwise you can have any one mischievous player coming in and contaminating the whole system. We won’t allow that,” she added.
Buch appeared to be referring to Paytm Payments Banks’ regulatory violations, which led to the Reserve Bank of India all but shutting down the operations of the bank. Paytm Payments Bank had inadequate KYC (Know your Customer) processes in place, which as per reports led to as many as 2,000 bank accounts being linked to the same PAN number. This reportedly allowed a “foreign entity” to perpetrate “extensive illegal activity” through Paytm Payments Bank. The illegal activity had reportedly included prohibited gaming activities and dating services, which had cheated lakhs of Indians out of their hard-earned money.
Madhabi Buch appeared to use Paytm’s example to suggest that the capital markets would always have strong KRA (KYC Registration Agency) processes which would ensure that accounts trading in the markets would have their KYC processes completed and vetted before they began trading in Indian stocks. She seemed to use the example of Paytm to show what the capital markets would look to avoid, and to make sure that robust compliance systems are maintained.
But Madhabi Puri Buch’s choice of words is interesting. She explicitly named Paytm several times, and even hinted that it was a “mischievous actor” that had allowed illegal activity to occur because of its lack of oversight. While Paytm has already been penalized for its inadequate KYC processes — its Payments Bank isn’t allowed to accept deposits or onboard customers, and its stock has been pummeled in the markets — the SEBI Chairman using its example as something her organization wouldn’t allow into their systems suggests that India’s regulatory bodies currently seem to hold Paytm in exceedingly low regard.