ED Notice Cripples Paytm Shares for Alleged FEMA?Violations

Paytm’s parent company, One97 Communications, is under the scrutiny of market investors and customers after the Enforcement Directorate (ED) served it with a show cause notice for alleged violations of the Foreign Exchange Management Act (FEMA). The?notice dated February 27 relates to alleged violations of ?611 crore involving OCL and its subsidiaries, Little Internet and Nearbuy India.

Key Points of Contention

The ED had found tax violations of ?245 crore in OCL, ?345 crore in Little Internet and ?20.9 crore in Nearbuy?India.

The flaws alleged are in connection to specific investment trades involving?these firms.

In 2017, Paytm had acquired the companies?Little Internet and Nearbuy. The company?has added that the alleged breach relates to the time before the two companies were its subsidiaries.

Company Response and Actions

OCL has said it is seeking legal advice and taking appropriate measures to “resolve the matter?in accordance with applicable laws and regulatory processes”. Paytm said?that the notice has no bearing on its services to consumers and merchants and that all its services are fully operational and safe.

Paytm shares ended at ?716.3?on the BSE on Friday, down 1.3%. The stock?is down 27% year to date but up 76% over the past 12 months. The market capitalisation of the company is ?45,676?crore. Paytm shares currently?have an average target price of ?871, which offers a potential upside of 22% from prevailing market prices, according to Trendlyne data.?

Background and Context

The ED's notice comes a day after Paytm settled a?case involving certain regulatory lapses with the Securities and Exchange Board of India (SEBI) for ?45 lakh. Earlier in the year, Paytm Payments Bank, an other associate entity, was also subject to regulatory enforcement action by the Reserve?Bank of India (RBI). Little?Internet also raised about $50 million in equity funding from Tiger Global Management and Elevation Capital. Ankur Warikoo co -founded Nearbuywas funded with approximately $22 million in equity funding from Peak XV Partners (formerly Sequoia India).

Expertise

Ankur Warikoo served as the founding CEO of the Groupon India business founded by him in?2011. In 2015, Warikoo and?the core management team of Groupon India bought the India business of Groupon, and made it an independent entity.

Conclusion

Disclosing details?about its show cause notice from the ED, the letter comes on the back of challenges faced by Paytm, clouding stock visibility. The business is taking steps to remedy the situation, but investors will?be watching closely.

Disclaimer: This is not a recommendation to buy or sell a stock.?

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