Paytm can't use IPO proceeds for buyback; firm's strong liquidity to be used

One 97 Communications Ltd, the operator of one of India's largest digital payments provider Paytm, cannot use proceeds of its mega initial public offering (IPO) for the proposed repurchase of its own shares, as regulations prevent any company from using IPO proceeds for a share buyback, sources said, adding that the firm will use its strong liquidity for the purpose.

The company's board is scheduled to meet on December 13 to consider a share buyback proposal.

"The management believes that given the company's prevailing liquidity or financial position, a buyback may be beneficial for our shareholders," it had stated in an exchange filing on Thursday.

Paytm has a liquidity of Rs 9,182 crore, as per the company's last earnings report.

After a much-watched listing late last year, the stock is down 60% in 2022 amid a global tech selloff. Questions are swirling around Paytm's profitability, competition, and costs related to marketing and employee stock options.

In November last year, Paytm had raised Rs 18,300 crore through an IPO. While the company last month said it would become cash-flow positive in the next 12-18 months, sources indicated the firm is close to cash-flow generation, which will be used for business expansion.

Amid buzz that the company is using IPO funds for the buyback, sources said regulations bar any company from doing so. The proceeds from the IPO can only be used for the specific purpose it is raised for, and that too is monitored.

In a recently concluded meeting with analysts, Paytm's top management highlighted that the company is close to cash-flow generation, which will be used for expansion in the future.

Sources said Paytm in all probability will use its pre-IPO cash reserves for the buyback and will start using the generated cash flow for its expansion in the near future.

The company has so far not provided any details of the buyback and size, and other details are likely to be disclosed after the board meeting.

There is speculation about the buyback being at a price below the IPO price. The law specifically prohibits side deals or negotiated deals for a buyback.

As a thumb rule, a company undertakes a buyback programme when it has surplus cash flow, which is sitting idle, or if its shares are available at a price below intrinsic value, and hence it's a great time to retire capital.

In Paytm's case, the buyback programme meets the criteria.

The company during the analyst meeting in Mumbai highlighted that it will be hitting EBITDA breakeven and would attain profitability by the end of September 2023.

It is also planning to grow its lending business via Paytm Postpaid and credit cards.

The fintech company had told analysts it expects payment processing charges, which account for a majority of its expenses, to decrease. On the regulatory side, Paytm said it did not expect any "significant risk" to its payment margins.

Paytm's recent numbers showed revenue surging by 76 % year on year and losses narrowing by 11% quarter on quarter.

The fintech reported a Rs 2,325 crore loss in 2021-22 and Rs 628 crore loss in the June quarter of 2022-23, which was trimmed to Rs 588 crore in the September quarter. Its Friday closing price on the BSE at Rs 545 is lower than the IPO price of Rs 2,150.

Paytm's shares have fallen nearly 68% since they started trading on the stock exchange in November last year.

(Additional information has been added to this PTI copy for context.)