India's probe of Paytm widens; $2.5 billion wiped off shares in three sessions

By Siddhi Nayak

MUMBAI (Reuters) - India's probe into digital payments firm Paytm has widened with the country's federal anti-fraud agency investigating violations of foreign exchange laws, sources said, days after the central bank asked the platform's banking unit to halt business.

Shares in Paytm, listed on exchanges as One 97 Communications slumped by their daily limit for a third day in a row on Monday in a rout that has wiped $2.5 billion off the company's value. That was before news of the probe by the anti-fraud agency, which came after Monday's market close.

India's Enforcement Directorate has sought data from the central bank, two sources familiar with the matter said. They did not indicate what specific provisions of the Foreign Exchange Management Act, which covers both individual and corporate transfers overseas, were the subject of the investigation.

A Paytm spokesperson denied any violations of foreign exchange laws, calling the allegations "unfounded and factually incorrect."

"Top fintech players like Paytm should adhere to rules and regulations set by the regulator," Vivek Joshi, secretary of the department of financial services, told Reuters when asked for comment.

The crisis facing Paytm has snowballed since the Reserve Bank of India (RBI) told Paytm Payments Bank last Wednesday to stop accepting fresh deposits in its accounts or its popular digital wallets from March.

"Paytm's entire brand is hit, credit operations are ceased and there is a potential collapse of its earnings stream which will take a while to get back on track," said Vinit Bolinjkar, head of research at Ventura Securities.

"With the regulatory crackdown, news flow surrounding investigative agencies, there is no visibility to the fortune of the stock and we will need a white knight to save its fortunes."

Sources familiar with the matter said the RBI had found hundreds of thousands of accounts at Paytm Payments Bank, one of India's most popular digital payment apps, that were created without proper identification. The RBI is concerned that some of the accounts could have been used for money laundering, according to the sources.

The central bank has passed the information on to the Enforcement Directorate, India's financial crime-fighting agency, they added.

One 97 Communications, also known as Paytm and the parent of Paytm Payments Bank, denied any connection to money laundering and said the companies have never been probed by the Enforcement Directorate.

Paytm's stock fell by its 10% daily limit on the Bombay Stock Exchange on Monday to a record low of 438.35 rupees, after falling by a 20% daily limit the previous two sessions. The stock was also near a record low on India's National Stock Exchange.

DIGITAL PAYMENTS

The RBI's regulatory clampdown could be a precursor to Paytm's licence being cancelled, a source familiar with the matter said.

The company powers most features of the popular digital payments app, which competes with the likes of Walmart's PhonePe and Google. Paytm has 330 million digital wallet accounts, which many people in India use to transfer funds, pay bills and make retail payments.

Two sources directly familiar with the matter said last week that these popular wallets will also not be able to operate after Feb. 29.

State Bank of India (SBI), the country's largest lender, said on Saturday that it was extending services to merchants and retailers through its payments subsidiary, SBI Payments Services, in response to the uncertainty around Paytm.

"We are ready for them," SBI Chairman Dinesh Kumar Khara said. "We are quite open in terms of coming to the support of the merchant community and we will be more than happy to provide them PoS (Point of Sales) machines."

The Hindu Business Line newspaper reported on Monday that Paytm is in exploratory talks with HDFC Bank and Jio Financial Services to sell the digital wallets business housed under Paytm Payments Bank.

A Paytm Payments Bank spokesperson said the company does not comment on market speculation while HDFC Bank and Jio Financial did not immediately respond to requests for comment on the report.

Shares of Jio Financial ended 13.9% higher on Monday following the report.

($1 = 83.0325 Indian rupees)

(Reporting by Chris Thomas in Bengaluru and Siddhi Nayak in Mumbai and Nikunj Ohri in New Delhi; Editing by Edmund Klamann, Himani Sarkar, Christina Fincher and Susan Fenton)