Rs 27,429 Cr share premium for a loss-making company whose accumulated deficit is Rs 13,170 Cr and expects no profit in the foreseeable future!

Under the erstwhile Controller of Capital Issues (CCI) era, such baseless premium-demanding IPOs would not have been allowed. To demand share premium, a company should have earned profits three consecutive years preceding the IPO. Also, the amount of premium will be decided by the quantum of profits that the company earned in three years prior to the issue.

In the late 1980’s, the flagship company of a notorious industrial group (known for its ruthless actions and investor-unfriendly policies) filed the draft prospectus for a premium equity issue. The office of the CCI had told the concerned merchant banker that it could sanction only a single digit premium based on the company’s past profits.

As the unscrupulous management could not challenge the CCI, the issue manager withdrew the prospectus. Subsequently, the unprincipled management re-audited the company’s accounts for backdated five years, applied again to the CCI and got the approval for a double digit premium!

In Paytm’s case, the twenty-year-old company has a history of net losses. Its accumulated losses have eaten away more than two-thirds of the colossal share premium (Rs 18,953 Cr) it had collected until June 2021. Further, if the RHP disclosure is anything to go by, the company expects to incur net losses for the foreseeable future!

Under the present so called `disclosure era’, Sebi may not be in a position to stop any loss making company raising huge share premium. But, the least it could have done is forcing such companies to highlight the risks attached to such baseless issue pricing.

Investing in technology and brand promotion without corresponding revenue and profits will not sustain long. A classic case is Vodafone. Also, without an accountable and identifiable promoter, if management is vested with ambitious professionals who work only for personal gains, where the company will end up at can be guessed from the IL&FS’ episode.

A strange aspect of Paytm founder is that he has preferred to be a majority (51%) shareholder in Paytm Payments Bank which has a much larger equity of Rs 400 cr. But, he intends to hold only around 9% of a relatively smaller equity of less than Rs 65 cr of his maiden public venture. This is the commitment the founder has for the public company!

PAYTM OFFER AT A GLANCE
Offer Type	Book Built
Platform	Main Frame
Offer Size	Rs 18,300 Cr
Fresh Issue	Rs 8,300 Cr (3,86,04,651 equity shares)
Offer for Sale	Rs 10,000 Cr (4,65,11,628 equity shares)
Face Value	Re 1
Price Band	Rs 2,080 – 2,150
Mkt/Bid Lot	6 Nos.
Implied M-Cap	Rs 1,39,379 Cr
Implied Equity Cap	Rs 64.83 Cr
Free Float	100%
Lead Manager	Morgan Stanley, Goldman Sachs, Axis Cap, ICICI Sec, J.P. Morgan, Citigroup Global and HDFC Bank
Registrar	Link Intime
Listing	BSE, NSE

 

INDICATIVE ISSUE SCHEDULE
Opening          :08-Nov-2021	Closing      :10-Nov-2021
Allotment        :15-Nov–2021	Refunding :16-Nov-2021
Demat Credit :17-Nov-2021	Trading     :18-Nov-2021

The Offer

New Delhi-based One97 Communications Ltd (owners of the popular brand Paytm) is entering the capital market with a mega Rs 18,300 Cr IPO (translating into 851.16 lakh equity shares) at the upper price band. The offer comprises of a fresh issue of Rs 8,300 Cr and an offer for sale of Rs 10,000 Cr. The IPO is being made through the book-building route with a price band of Rs 2080-2150 for Re 1 paid-up share.

Applicants for the IPO should bid for a minimum lot of 6 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on November 18, 2021. Morgan Stanley India, Goldman Sachs (India) Securities, Axis Capital, ICICI Securities, J.P. Morgan India, Citigroup Global Markets and HDFC Bank have been roped in as the lead managers to the offer. Link Intime is the registrar to the issue. The bidding opens on Monday, November 8 and closes on Wednesday November 10, 2021.

The company proposes to utilize the net proceeds from the fresh issue towards strengthening the Paytm ecosystem by acquisition and retention of consumers and merchants and providing them with greater access to technology and financial services (Rs 4,300 Cr); investing in new business initiatives, acquisitions and strategic partnerships (Rs 2,000 Cr); and general corporate purposes (balance amount).

 

Lineage

The IPO document of One97 Communications Ltd (OCL) claims that the two decade-old OCL is a professionally managed company and it has no identifiable promoter. But, the fact is, when the company was incorporated in December 2000, the Chairman-cum-Managing Director and Chief Executive Officer of the company, Vijay Shekhar Sharma, was one of the original signatories to the MoA. In other words, he is the founder with the single largest individual holding in the company but, does not want to be the promoter of the company.

The unlisted OCL has an unusually large shareholder base of 6338 nos. Just three shareholders namely, Antfin (Netherlands) Holding B.V. (27.9%), SVF India Holdings (Cayman) Ltd (17.3%) and SAIF III Mauritius Company Ltd (11.4%) are holding more than the founder. Nine shareholders hold more than 1% each aggregating to 85.8%. Among the directors and key management personnel, except the founder-MD, no one holds more than 0.2%.

As regards OCL’s track record, though registered in the year 2000, the company got visibility only after the launch of Paytm in 2009. Paytm payment service allowed prepaid users to top up their mobile accounts and also shop directly using their bank accounts or credit cards. Three years later, OCL launched its own payment gateway. The company received the RBI licence for semi-closed wallet in 2013 and launched Paytm wallet app for iOS and Android in 2014.

RBI issued a license to Paytm Payments Bank Ltd in 2017 to carry on ‘payments bank’ business in India. Strangely, the well established corporate body (OCL) preferred to hold a minority stake of 49% while the individual founder-professional coveted the majority holding of 51% in a large equity base of Rs 400 cr. Paytm Payments Bank launched Paytm FASTag across India in 2017.

OCL’s subsidiary Paytm Money Ltd obtained certificate of registration from SEBI in 2019 to act as a ‘stock broker’. In the following year, IRDAI issued certificate of registration to another subsidiary of OCL, Paytm Insurance Broking Ltd, to act as a ‘direct broker (life and general insurance).

Operationally, OCL claims to have been very active in last twelve years. It has convinced many a private equity/venture capital investor to collectively pump in more than Rs 19,000 cr. What has the company achieved with the huge funds? Its top line has crossed Rs 3000 Cr but, more than two-thirds of the share premium collected from the private investors has gone into the drain as accumulated losses!

 

Key Management

Currently, OCL has eight directors, comprising one Executive Director, three Non-Executive Directors and four Independent Directors, including one woman Independent Director. Founder Sharma (43) is the Chairman, Managing Director and Chief Executive Officer. He holds a bachelor’s degree in electronics and communications from the Delhi College of Engineering.  He will draw a remuneration of Rs 4 Cr per annum besides other applicable perks. He is also entitled to a separation compensation in case of ‘termination without cause’, which will be equivalent to his total remuneration for a period of 12 months.

London-based Munish Varma (50) is a non-executive nominee director representing SVF. He has master’s degree in business administration from Cornell University. He currently serves as a managing partner at SoftBank Investment Advisers. US-based Ravi Chandra Adusumalli (45) is a non-executive nominee director representing SAIF and Elevation Capital. He holds a bachelor’s degree in economics and government from Cornell University. He is currently the managing partner of Elevation Capital. US national Douglas Feagin (55) is the third non-executive nominee director representing Antfin (Netherlands) Holding B.V.

Three US-based professionals namely Mark Schwartz (67), Ashit Lilani (55) and Neeraj Arora (42) have been roped in as independent directors. Schwartz holds a bachelor’s degree in arts and a master’s degree in business administration from the Harvard University. He has served as a vice chairman and managing director of the Goldman Sachs Group, Inc. Lilani holds a bachelor’s degree in commerce from the Bangalore University and a master’s degree in business administration from Philadelphia College of Textiles and Science. He is the managing partner and co-founder of Saama Capital.

Arora holds a bachelor’s degree of technology in mechanical engineering from the Indian Institute of Technology, Delhi and has completed a post graduate program in management from the Indian School of Business. He was earlier associated with Google Inc. and Whatsapp, Inc. He is the founder of halloapp, Inc. Pallavi Shardul Shroff (65) is the woman Independent Director. She currently serves as the managing partner of the law firm Shardul Amarchand Mangaldas & Co.

While no remuneration has been paid to the Independent Directors in fiscal 2021, the company has proposed to pay an annual compensation of Rs 1.85 cr each to Schwartz and Shroff, and Rs 1.48 cr each to Lilani and Arora.  In addition to the annual remuneration, the Independent Directors will be receiving sitting fee for every meeting and re-imbursement of expenses in relation to attending of the meetings (flight, transportation, hotel stays, etc).

 

Business Model

OCL is claimed to be India’s leading digital ecosystem for consumers and merchants, as it has built the largest payments platform in the country based on the number of consumers, number of merchants, number of transactions and revenue as of March 31, 2021. The company reportedly offered payment services, commerce and cloud services, and financial services to 337 million registered consumers and over 21.8 million registered merchants, as of June 30, 2021.

The company derives its revenue under two streams: Payment & Financial Services and Commerce & Cloud Services. For payment services, it generates revenues from the transaction fee, consumer convenience fee and recurring subscription fee from merchants for certain products and services, such as Paytm Soundbox and POS. The fee percentage varies by the type of payment instrument used by consumers and the category of merchant.

For financial services, the revenue generation depends on the type of services offered by the company and through its financial institution partners on Paytm platforms (i.e. lending, insurance, and wealth management) and within each business, the type of product. For travel, entertainment and ticketing, and other commerce businesses, the company generates revenue by charging merchants a transaction fee, and/or consumers a convenience fee, which is typically linked to a percentage of transaction value.

 

Financial Track

OCL seems to have followed the disclosure era regulations in letter and spirit.  Under the risk factor, the offer document clearly states:”We have a history of net losses and we may not be able to achieve profitability”. According to the offer document, the company expected to incur losses for the foreseeable future. Because the market for its platforms, products and services was evolving, it was difficult for the company to predict future results of operations.  The company’s operating expenses were expected to increase due to additional personnel, broaden marketing efforts and promotional activities. If the disclosures made in the offer document are anything to go by, one cannot be too optimistic about OCL’s prospects. Under such circumstances, it is very difficult to predict when the company will be able to wipe out the accumulated loss of Rs 13,000 Cr.

ONE97 COMMUNICATIONS CONSOLIDATED FINANCIALS (Rs Cr)
Year Ended	Mar-21	Mar-20	Mar-19
Revenue from Operations	2802	3281	3232
Other Income	384	260	348
Total Income	3187	3541	3580
Employee Cost	1185	1119	856
Payment Processing Charges	1917	2266	2257
Software, Cloud and Data Centre Expense	350	360	310
Other expenses	1118	2170	4175
Exceptional Items	-102	-361	-73
Interest	35	49	34
Depreciation	179	175	112
Net Profit / (Loss)	-1701	-2942	-4231
Equity (Implied)	65	60	58
Reserves (Implied)	27854	19246	14069
Accumulated Loss	12872	11201	8402

Valuation

While losses have eclipsed more than two-thirds of the huge share premium collected, the company intends to collect another Rs 8296 cr share premium via public issue. In the absence profitability even after two decades, the company cites some qualitative factors to justify the offer price of Rs 2,150 for Re 1 paid up share.  No doubt, an ecosystem that allows to address large market opportunities; a trusted brand, scale and reach; their insights of Indian consumers and merchants; product and technology DNA; etc., etc. do sound attractive. But, are they capable of generating profits? For more than a decade, the company has not been able to prove its worth in terms of profitability. When there is no promoter to be made accountable, if the company fails to turn around within one year that is before the lock-in period lapses, what will happen to the stock price when the founder, whose average cost of holding is only 50 paise per share, turns seller in the secondary market?

 

Concern

• The company is facing direct and indirect tax proceedings (19 cases) amounting to Rs 3735 Cr. A show cause notice (SCN) issued in this respect alleged that due tax had not been paid under correct head and input tax credit had been wrongly claimed/availed and utilized by the Company by making wilful-misstatements and supersession of facts.
• The public company (OCL) has a significant amount of related party transactions with Paytm Payments Bank (PPB) yet, it has been given a minority stake of 49% while the founder who could stake in only less than 10% and relinquished the promoter status  in the public company,  has coveted the promoter status in the Payment Bank with 51%. One cannot rule out the possibility of PPB outgrowing OCL at the cost of the latter. After all, blood is thicker than water!
• By presenting as a professionally managed company without an identifiable promoter, the founder has escaped from the requirement of minimum promoter’s contribution in the offer and accordingly none of his shares will be locked in for a period of three years.
• Paytm Payments Bank received a show cause notice dated July 29, 2021 from RBI stating that PPB had committed an offence under Section 26(2) of the Payment and Settlement Systems Act by submitting false information to RBI confirming completion of the transfer of the Bharat Bill Payment Operating Unit business by OCL to PPB. Consequently, RBI imposed a penalty of Rs 1 Cr on PPB and served a ‘Letter of Displeasure’ on OCL.
• OCL’s funding requirements and the proposed deployment of net issue proceeds of over Rs 8000 cr have not been appraised by any bank or financial institution or any other independent agency.

• Despite having tapped more than Rs 19,000 Cr from the shareholders, OCL’s registered office, corporate office and other offices across the country are located on leased premises.