Shares of One97 Communications (or Paytm) zoomed unprecedentedly on Tuesday by over six per cent when its founder and CEO, Vijay Shekar Sharma announced that Resilient Asset Management B.V will acquire the stake in Paytm from Antfin through an off-market transfer.

Resilient Asset Management B.V is an offshore or overseas entity fully owned by Sharma and will purchase 10.3 per cent stake held by Antfin in Paytm. In consideration of the stake acquired, Resilient Asset Management will issue optionally convertible debentures (OCDs) to Antfin. Post this transaction, the Chinese domiciled Antfin will hold 13.49 per cent stake in Paytm and not have any of its nominee on the latter’s board.

The stock market cheered this news because the transaction was perceived as lifting the hurdle for the Reserve Bank of India to favourably consider Paytm’s application for payment aggregator license. It is believed that the dominance of Chinese investors in Paytm didn’t go down well with the regulator for it to be seen favourably for granting fresh licenses.

It’s worth noting that Paytm’s application has been rejected twice by the RBI.

So, does the OCD issuance make it all kosher?

Two critical aspects need to be considered here– first, the nature of the instrument used as a consideration for the transaction and second, the regulator’s comfort on such instruments historically used for such transactions.

Exchange of consideration is said to critical element in any transaction. There needs to be a tangible ‘something’ that much have changed hands. In this instance, optionally convertible debentures of Resilient Management Services BV will be issued to Antfin. While the number of debentures issued hasn’t been revealed, Antfin will get to retain economic value of the 10.30 per cent stake in Paytm through the OCDs of Resilient. Unlike compulsorily convertible debentures which is usually treated at par with equity from day 1 of issuance, OCD has the advantage of retaining its debt tag till conversion. Also, the conversion could be partial or full. Ever since the Companies Act tightened the norms around intercorporate loans, OCDs have become a popular instrument to structure debt transaction. They can be issued at zero coupon as well. In the Antfin – Paytm transaction, the coupon rate, total number of OCDs issued, duration for maturity of the instrument, etc have not been revealed, which makes the transaction questionable, although very much legitimate.

Assume a case where Antfin decides to convert 100 per cent of the OCD to equity in Resilient Management Services. It might still indirectly be a chunky shareholder of Paytm.

Will the regulator be comfortable in that case?

Rewind to August 1, 2018 when Kotak Mahindra Bank decided to raise ₹500 crore by issuing non-convertible preference shares to dilute the promoter stake to 19.7 per cent. The structure was legally valid, and pricing was transparent. But it didn’t cut ice with the RBI because preference shares were seen at par with equity although it was not convertible to equity. Preference shares carry a fixed coupon payment and rank below debt instruments in the waterfall mechanism of liquidation. While legally there wasn’t a flaw in the structure, the central bank wasn’t initially comfortable with a non-equity instrument used as a mode to reduce the promoter holding in the bank.

Certainly, the underlying circumstances at Kotak Bank and Paytm are different. Whether it was instrument, reasons for its issue and the corporate identity of the issuer and receiver. But the regulator wasn’t pleased with the banks move. Will it be a different experience for Paytm?

Related Topics
comment COMMENT NOW