@ themomingcontext.com Paytm and how not to be a bank board member Send to Kindle Till Thursday, I never looked at who were the board of directors at Paytm Payments Bank, currently the centre of attention for all the wrong reasons. My bad? No, I knew from somewhere that Paytm founder Vijay Shekhar Sharma described himself as its part-time chairman and that wasn’t inspiring enough to dig deeper. (Paytm owns 49% in the payments bank, with Sharma holding the remaining 51%.) Not that I don’t admire what Sharma had done to the payments industry in India. Out of nowhere he had simplified making and receiving payments to a point where “Paytm karo” became the de facto method in just a few years. For once, it appeared that the stiff-lipped banking regulator was enamoured by what was happening. The Reserve Bank of India allowed a band of tech-driven finance companies—a.k.a. fintechs—led by Paytm to march along with little or no restraint. It was the likes of Paytm that prompted the RBI to come up with the concept of a payments bank in late 2013, to give a regulatory pathway to fintechs which were making the RBI’s job of access to financial products easy. Except this latest fiasco with Paytm Payments Bank—where the RBI has banned it from accepting new deposits from March, seemingly over shoddy KYC and anti-money laundering processes—turns the whole thing on its head. And there the board needs focusing on, Every one apart from Sharma on the board has either banking or regulatory experience and they can in no way feign ignorance about what it takes to run a bank or deal with the RBI. Independent director Ramesh Abhishek, a retired IAS officer having headed erstwhile commodities regulator Forward Markets Commission, has had first-hand experience of being involved in a commodities contract scam and knows what exactly it takes to run a regulated operation. There is also Shinjini Kumar, who spent 15 years in the RBI, before becoming a banking regulations consultant, and also Arvind Kumar Jain and Manju Agarwal, veteran bankers with three decades’ experience each. In total, there were five independent directors as opposed to four employee directors, including Sharma. It is then all the more surprising that a simple operation like a payments bank has slipped from bad to worse in a longish span of 30 months. A month before Paytm (One 97 Communications Ltd) floated its IPO in November 2021, the RBI fined its payments bank unit Rs 1 crore for false statements in documents submitted to the regulator. In March 2022, the RBI stopped the payments bank from onboarding new customers. It had then directed the bank to appoint an IT audit firm to conduct a comprehensive system audit of its IT system. It looks like neither the bank nor its board took the RBI’s oversight seriously. Paytm Payments Bank started operations in November 2017, and by March 2021, it had already built a customer base of 64 million and a deposit base of Rs 5,400 crore. True to its tech style, the bank onboarded customers merely on their mobile phone numbers to start with and the RBI insisted that there should be a second layer of authentication for the address of the customer. Paytm’s initial argument was that the customer had already done a stringent KYC (know your customer) documentation with the telecom company to obtain the mobile number and there was no need to duplicate it. But the RBI wouldn’t budge as it was mandatory for banking subscribers to submit both identity and address proofs together under its KYC rules. The RBI was under pressure to rein in cybercrime and the traceability of transactions was key to building its defence. The muck hit the roof last October. The RBI’s department of communications put out a public notice stating that it was fining Paytm Payments Bank Rs 5.29 crore for several violations that included KYC norms, reporting unusualcybersecurity incidents and securing mobile banking applications including the UPI ecosystem. The RBI found that the bank had onboarded several corporate account holders but had failed to pin down their beneficial owners and that exposed the banking system to fraud. Paytm Payments Bank’s gateway also did not flag overseas IP addresses, potentially helping unauthorized overseas transactions. The fine was imposed after the RBI scrutinized the KYC adherence and had an external auditor conduct a comprehensive system audit. We must appreciate that the RBI is grappling with technology issues in banking. Famously, it took HDFC Bank to task for its unreliable netbanking and mobile banking applications and banned the lender, India’s largest private sector lender, from issuing credit cards as a punitive measure. That ban lasted about eight months. The central bank is also at the receiving end for being unable to stop impersonation frauds, which are causing losses to banking customers across the spectrum. Paytm Payments Bank’s transgressions touch every issue that the RBI is worried about, from cybersecurity to data ownership to money laundering. It couldn’t risk being caught as a mere spectator even if it involved bringing down India’s best fintech startup story thus far. The RBI’s public notice received some attention from Paytm, the main entity (One 97 Communications). As is mandatory for listed companies, One 97 in an intimation to shareholders that Paytm Payments Bank (which it calls an “associate” since One 97 doesn’t have a majority stake) had informed them that the RBI had imposed a fine. One 97 also said that “the action is not intended to pronounce upon the validity of any transaction or agreement entered into by PPBL with any of its customers”. Now what did the eminent board of the payments bank unit do or what could have they done? Clearly, they were there because they wanted to be associated with one of the star startups in the country. Being a board member of a Paytmassociate looked good in their calling card as much their presence lent Sharma his power. We understand that board meetings, especially of unlisted private-sector entities, are secret affairs. But here was India’s banking regulator pounding at the door with charges of misdemeanour and a room full of people decided to handle the situation quietly? The consequences could have been really bad if the RBI had traced any overseas terror funding and all of them would have then been on the dock overnight. We will never know if the central bank has already found such transactions that made it move in with a sledgehammer. In the few spectacular failures of Indian boards, it was usually a whistleblower or an outsider that brought its downfall. In the case of Hyderabad-based software company Satyam Computers, a whistleblower letter finally exposed the financial irregularities of its promoter, Ramalinga Raju. In the case of ICICI Bank or the National Stock Exchange, their boards had to eventually find a way to oust their managing directors after outsiders exposed their complicity in running their business. In the case of Paytm Payments Bank, the action of the board wasn’t visible even though the charges were shown to them in black and white by the regulator. All that was needed was for a board member to write a letter to Sharma and One 97 Communications asking for a roadmap for rectification or compliance. Now, One 97 has eminent lawyer Pallavi Shroff on its board, who is used to dealing with financial regulators as her firm runs an eminent corporate law practice. She certainly wouldn’t have advised overlooking a complaint or warning letter from a director of an RBI-governed entity. Instead, everyone just went quiet and let events unfold. Perhaps it is the inability of a bank board to tackle such a serious charge that eventually led to the exit of Warren Buffett’s Berkshire Hathaway as a shareholder of One 97 Communications in November 2023. The investor, whose presence was a feather in Sharma’s cap, exited the stock selling its entire 2.34% at a loss of Rs 620 crore. There wasn’t one voice of alarm either from theindependent director at both One 97 or Paytm Payments Bank. Hiding behind the veil of board secrecy, they were simply useless for the public shareholders at large. Paytm Payments Bank’s page on its board of directors reads “A company is worth the company it keeps”. At least will it now occur to them that they will go down if Sharma sinks the ship? Cover image by Pushkin Chakraborty/The Monring Context. beeps:/themorningcontext.com/business/paytn-and-how-not-to-be-a-bank-board-member