What is happening with Paytm?

Paytm made headlines with the news, “Vijay Shekhar Sharma is going to acquire an additional 10.3% stake in Paytm from Antfin (Netherlands) Holdings B.V. through an off market transfer in a no cash deal”. 

Post this news, Paytm’s stock rose by about 11%. Lagta he Paytm ke,

After reading the news, a couple of interesting questions popped into my mind – maybe you must have wondered about them too. To begin with,

• Why are both businesses located in the Netherlands?
• How is it possible that this change is occurring without any cash involved?
• An investor selling an interest in a company is often viewed negatively. Additionally, when a founder or promoter purchases a stake, it's typically viewed as a positive indicator; however, in this situation, Paytm is dealing with both possibilities. What does this signify for the business, then?

Ta-Da! The genie is back🧞. So, let me break down the news for you.

Let's first introduce ourselves to the parties to the transaction.

Antfin (Netherlands) Holdings B.V

Antfin (Netherlands) Holdings B.V. is a venture capital fund with a strategic focus spanning across various sectors. A subsidiary of China's Ant Group Co., it operates as an affiliate of the renowned conglomerate Alibaba Group. Established in 2019 and headquartered in Amsterdam, Netherlands, Antfin (Netherlands) Holdings B.V. operates under the legal framework of a private limited company, denoted by the abbreviation "B.V." in its name, which stands for "besloten vennootschap" in Dutch.

As of the first quarter of the fiscal year 2024 (Q1FY24), they held a significant stake of 23.8% in Paytm, thus earning the distinction of being the largest shareholder in the company. This strategic ownership had positioned them as a key player in Paytm's ownership structure.

Now, let’s meet the next company involved.

Resilient Asset Management B.V.

It is a foreign firm in which Vijay Sharma owns a 100% stake. This company is also based in the Netherlands. But it is still unclear whether this company was specifically created just to hold the Antfin stake, or whether it has other operations in the Netherlands?

During my investigation on this matter 🕵️, I stumbled upon a LinkedIn post revealing an interesting development. It appears that Vijay Shekhar registered an asset management company on July 14. Strangely, he added two more directors to this newly formed corporation just five days later. This series of events might imply that this company was deliberately designed to simplify the transaction in question. 

Now, the question arises why do companies set up their holding companies in the Netherlands? 🤔

The main justification for businesses choosing to set up their holding organisations in the Netherlands is to reduce double taxes. The holding firm can avoid paying corporate and dividend taxes on earned income thanks to this calculated strategy. This is particularly advantageous when managing multiple operating companies, this approach spares the holding company from navigating the intricacies of the conventional salary structure within each individual operating entity.

Let us get to the details. 

What exactly is happening with Paytm?

So after the transaction, Vijay Shekhar Sharma will become the largest shareholder with 19.42%, while Antfin's stake will reduce to 13.5%.

Antfin will transfer 6,53,35,101 shares of Paytm to Resilient Asset Management BV. Now here’s the catch, Resilient Asset Management BV is not paying a single rupee to Antfin for this 10.3% stake in Paytm. 

In exchange for the 10.3% stake, Resilient will issue Optionally Convertible Debentures (OCDs) to Antfin, the value of which is expected to be around $628 million. This will ensure that Antfin retains the economic value of the stake.

But, 

What are these OCDs? 

OCDs are hybrid financial instruments that offer the holder the option to either convert them into equity shares or retain them as debt without conversion 🥱

Koi na, me samjhati hu! 😌  

Here's a closer look at the different elements:

1. Optionally: The word "optionally" denotes that there is no requirement for the conversion. Depending on how the holder perceives the company's prospects and the state of the market, they may decide to convert the debentures into shares.

2. Convertible: The "convertible" aspect of OCDs means that the holder has the option to convert the debentures into a predetermined number of shares of the issuing company. Usually, this conversion is carried out at a predetermined cost. This enables the holder of the debenture to possibly profit from any growth in the value of the company's stock.

3. Debentures: These are loans that a business has issued. When an investor buys a debenture, they are lending money to the company in exchange for a promise of regular interest payments and repayment of the principal amount at maturity.

Here is how the OCDs will work in this case:

Resilient Asset Management BV will borrow money from Antfin and will pay periodic interest on the principal amount. Antfin will have the option to convert the debentures into equity shares.

When we look at this transaction closely it is clear that the founder is buying a stake, while Antfin (FII) is not fully selling it. Instead, Antfin has the option to convert the debentures into equity shares of Resilient at a predetermined price within a specified timeframe.

So, the founder's stake acquisition is viewed positively for the company. And, the option to convert OCDs into equity suggests an interest in owning equity in Resilient, which will directly hold Paytm's stake.

To see how the company's shareholding, before and after the acquisition, take a look at the image below.

Coming to the last question.

Why is the FII selling considered advantageous in this situation?

In this scenario, the sale of Antfin's stake is taken positively by the investors. The rationale behind this positive sentiment lies in the fact that Antfin is an affiliate of the Chinese firm Ant Group. They were the majority stakeholder and the "chinese ownership" presented a notable obstacle for the company, imposing limitations on various fronts. Notably, it hindered their ability to secure the NBFC (Non-Banking Financial Company) license from the Reserve Bank of India (RBI).

The exit of the Chinese company will bring about a favorable outcome for several reasons and is thus taken in a positive manner. 

My Vishesh Tippani

And now, I'd like to share my personal take on the topic we've been exploring. Even while the advances are unquestionably good for the business, it's crucial to keep a balanced viewpoint that takes into account both possible consequences. 

Perhaps there is room for company improvement behind these recent changes. It's advisable to accept both the positive potential and any expected challenges.

Is the negative trend in Paytm's share prices about to reverse? There is no doubt that the ownership change carries a lot of weight. However, it's as important to examine the company's finances because they offer a thorough lens through which we can assess its entire performance and health.

The Bottom Line

In summary, the recent Paytm shareholding shift, with Vijay Sharma becoming the largest shareholder and Antfin reducing its stake, signifies a promising turn of events. Sharma's increased ownership illustrates his belief in Paytm's future, and the company's ability to transform as interpreted by the decreased Antfin share. 

These changes set the stage for growth, innovation, and strategic partnerships, underlining Paytm's resilience in a dynamic, digital landscape.