Why has the apex banking regulator penalised Paytm Payments Bank Ltd?
The RBI has disallowed the Paytm subsidiary from accepting further deposits,.
It indcludes top ups or credit transactions into its operated wallet or accounts from February 29.
This also applies to its prepaid instruments for FASTags and National Common Mobility Cards (NCMC) cards.
Present customers would, however, be allowed to use their existing balances to avail the services.
The payments bank, according to Macquire Capital, houses the parent company One97 Communication (OCL)’s more than 330 million wallet accounts.
PPBL has been prohibited from carrying out any banking services (in the nature of services like AEPS, IMPS etc), bill payments and UPI.
It has also been directed to “terminate at the earliest”, or before February 29, nodal accounts of its parent company and Paytm Payments Services.
Nodal accounts are a type of bank account opened by businesses (financial intermediaries) and are used for holding money from participating banks.
Lastly, the regulator has asked the subsidiary to settle all pipeline and nodal accounts transactions by March 29.
No further transactions shall be permitted thereafter.
Equity researchers at Macquire Capital believe the move may result in revenue and profitability implications in the medium to long term.
The parent company expects the latest action would have a “worst case impact” of ₹300 to ₹500 crore on its annual EBITDA (earnings before interest, taxes, depreciation, and amortisation).
What are the concerns regarding money laundering?
The first set of concerns relates to its licensing.
RBI guidelines for licensing of payments banks stipulate that entities cannot undertake lending activities.
PPBL does not lend directly.
Instead, it provides credit-dispensing products from third parties.
The other issue relates to its governance structure and related party-transactions.
For perspective, Paytm owns 49% of PPBL.
OCL in its initial response put forth that, adhering to banking regulations.
It further argued against having exerted any influence on the subsidiary's operations other than as a minority board member or shareholder.
It further communicated having “reconfirmed” with founder that he has not taken any margin loans or pledged any shares.
Researchers at Macquire observed the bigger issue arose with the company not being in the good books of the regulator.
Furthermore, news publication NDTV Profit recently learnt that over 1,000 accounts were found to be linked with the same PAN to their accounts.
Prevention of Money Laundering Act - PMLA Objectives
The Prevention of Money Laundering Act (PMLA) is a legislation enacted by the Indian Parliament in 2002 to prevent and combat money laundering.
The Act defines money laundering as the process of disguising the illegal origin of money, thereby making it appear to be legitimate.
This is typically done through a series of transactions that layer the money and move it around to different jurisdictions.
The PMLA has several objectives, including:
To prevent the generation of black money: The Act aims to curb the generation of black money by making it difficult for criminals to launder their ill-gotten gains.
To deter criminals from engaging in illegal activities: By making it more difficult to launder money, the Act aims to deter criminals from engaging in illegal activities such as drug trafficking, terrorism, and corruption.
To protect the financial system: The Act helps to protect the financial system from being used for money laundering activities.
To confiscate the proceeds of crime: The Act allows the authorities to confiscate the proceeds of crime, which can then be used to fund law enforcement or other government initiatives.
To promote international cooperation: The Act is in line with international standards on money laundering and helps to promote international cooperation in combating this crime.
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