SEBI issues warning to Paytm over unapproved transactions with Paytm Payments Bank

Haripriya Epuri,

Sri Krishnadevaraya University

One97 Communications Ltd, the parent company of Paytm received a stern warning from the Securities and Exchange Board of India (SEBI) recently over unauthorized transactions with Paytm Payments Bank Ltd. (Paytm Payments Bank Ltd.). This regulatory action emphasizes on the implementation of laws that control related-party transactions, financial reporting, and corporate governance in India. This article provides a thorough Legal analysis of SEBI’s warning, emphasizing pertinent case laws, regulatory standards, and parts of Indian Law.

Paytm, a prominent player in the digital payments industry in India, functions through multiple subsidiaries, one of which is Paytm Payments Bank Ltd. (PPBL). The transactions between One97 Communications and Paytm Payments Bank Ltd. that allegedly avoided obtaining the required clearances are the subject of SEBI’s warning, which raised serious compliance issues.

SEBI Act, 1992: Regulatory Authority and Enforcement

SEBI is authorised by the SEBI Act,1992 to oversee the securities market and safeguard the interests of investors. As per section 11 and section 11B of SEBI Act, which describe the duties of SEBI, include overseeing the securities market, defending the rights of investors, and encouraging them by maintaining the growth of the securities markets. These clauses give SEBI the authority to look into and take the appropriate steps to guarantee that securities rules are followed.

Comprehensive Legal Analysis of Paytm’s Alleged Non-Compliance on Unauthorized transactions between One97 Communications and Paytm Payments Bank Ltd. which was subject to SEBI’s warning to Paytm as per the Companies Act, 2013, and the SEBI( Listing Obligations and Disclosure Requirements) Regulations are examined for possible violations in relation to these transactions. In particular, the requirement for previous approvals from the Board, Audit Committee, and shareholders is examined.

Possible Infractions Violation By Paytm as per the Companies Act, 2013:

Undertaking transactions with Paytm Payments Bank Ltd. without acquiring the required authorizations would be considered as a violation as per section 188. Similarly, section 177, provides that every related-party transaction must first be approved by the Audit Committee. The committee’s role is to make sure that these deals are in the best interests of the company. The goal of the legislative framework is to avoid conflict of interest and guarantee company dealings that are carried out with appropriate supervision and at arm’s length.

Non- Compliance with Regulation 23 and 4(2) of SEBI Listing Obligations and Disclosure Requirements, 2015:

Non-compliance as per SEBI Listing Obligations and Disclosure Requirements Regulations is indicated as the inability to obtain the permission of the shareholders and the audit committee for significant related party transactions as per regulation 23. As per regulation 4(2) which emphasizes on the listed companies that are required to make sure all relevant information to be disclosed to shareholders in a timely manner and with accuracy by the principles of fairness, transparency and accountability in disclosure.

The fines and other punitive measures for companies and their officers in case of non-compliance with sections 450 and 451. As section 450 deals with penalties in cases on stipulation that if a company or its employees violates the act, they will be subjected to a fine up to ten thousand rupees and additional fine up to one thousand rupees for each day the violation persists after the first. Whereas section 451 provides the penalty for persistent defaults then an individual or a company will be fined twice as much as the original default amount if they commit the same offense again within three years. Thus, these regulations contribute to improving transparency as per the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015,by offering an extra level of governance.

Legal Implications on Paytm

● According to the Companies Act of 2013, failure to comply with section 188 may lead to fines and penalties for the firm and its officers under section 450. Under section 450, individuals or employees who are persistent to non-compliance may face harsher sanctions, such as increased fines and possibly even imprisonment.

● According to SEBI regulations, SEBI is able to enforce proceedings in accordance as per the SEBI Act, 1992. These actions may include the issuance of show cause notices, the imposition of fines, and the direction of corrective activities to guarantee compliance. The goals of SEBI’s enforcement strategies are to safeguard investor interests and preserve market integrity.

Relevant case laws and Judicial Precedents:

Reliance Industries Ltd: In this case, Reliance Industries was investigated by SEBI for related-party transactions which are carried out without the necessary approvals. The Securities Appellate Tribunal (SAT) affirmed the orders of SEBI, stressing on the importance of rigorous adherence to regulatory mandates in order to preserve corporate governance norms. Regarding the significance of openness and appropriate approval procedures in related-party transactions, this case established an important precedent.

Vedanta Resources PLC: The decision rendered by the Supreme Court in this case reaffirmed SEBI’s jurisdiction to oversee and enforce compliance in the securities industry. They reaffirmed that in order to maintain transparency and safeguard investors, entities must abide by disclosure and approval standards. This case emphasized SEBI’s extensive investigative and punitive capabilities against non-compliant businesses, hence underscoring the significance of regulatory compliance.

To conclude:

The caution issued by SEBI to Paytm about unauthorized transactions with Paytm Payments Bank Ltd. emphasizes how crucial regulatory compliance is for corporate governance. Complying with the SEBI Listing Obligations and Disclosure Requirements Regulations and the Companies Act, 2013 is essential to guarantee accountability, equity, and openness in

related-party transactions. Notwithstanding penalties and non-compliance erodes investor trust and compromises the integrity of the financial system.

The Legal precedents and regulatory environment provides a strong emphasis on related-party transaction approval procedures on strict compliance norms. To avoid regulatory violations and comply with the best practices in corporate governance, businesses need to have strong internal controls and governance frameworks. This case demonstrates how SEBI’s strict enforcement of compliance standards preserves investor interests and upholds the integrity of the market.

References:

● Rajesh Sharma, Paytm gets SEBI warning on related party transactions with Payments Bank, Hindustan Times (published Jul 16,2024 09:19 AM IST), https://www.hindustantimes.com/business/paytm-gets-sebi-warning-on-related-party-transactions-with-payments-bank.

● Vidhi Taparia, Paytm receives SEBI warning over unapproved transactions, Fortune India (Published Jul 16,2014), https://www.fortuneindia.com/enterprise/paytm-receives-sebi-warning-over-unapproved-transactions.

● Ajinkya Kawale, Paytm gets SEBI warning for transactions with banking unit, Business Standard ( published Jul 16,2024), https://www.business-standard.com/companies/news/paytm-gets-sebi-warning-over-old-transactions-with-paytm-payments-bank.

● Koustav Das, Paytm says in compliance with regulations after administrative warning from SEBI, India Today (published Jul 16,2024), https://www.indiatoday.in/business/story/paytm-says-in-compliance-with-regulations-after-administrative-warning-from-sebi

● Ministry of Corporate Affairs(MCA), https://www.mca.gov.in/bin/dms/getdocument ( last visited 9 feb 2024)

● Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, https://www.sebi.gov.in/legal/regulations (last visited september 20,2023)

● SEBI Act,1992 section 11 and 11B, https://www.sebi.gov.in/acts .