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Why Paytm IPO failed to Impress the Investors

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Teaching Notes
This teaching note was written by Ms Mamta Sharma (Chandigarh Group of Colleges,
Landran, Mohali), Dr Baljinder Kaur (Chandigarh Group of Colleges, Landran, Mohali)
and Ms Radhika Giri (Chandigarh Group of Colleges, Landran, Mohali) and Dr Smiti

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Jhajj (Chandigarh Group of Colleges, Landran, Mohali). It is intended to be used as the
basis for the class discussion rather than to illustrate either effective or ineffective
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handling of a management situation. This case was compiled from published sources.
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 122-0097-8

Why Paytm IPO failed to Impress the Investors

*Mamta Sharma (AP, Finance, [email protected])
**Dr. Baljinder Kaur (AP, Marketing, [email protected])
***Radhika Giri (AP, Finance, [email protected])
****Dr. Smiti Jhajj (HOD-MBA, Finance, [email protected] )

Teaching Notes

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Synopsis:
Paytm is the largest FinTech and e-Commerce Payment Company based in Noida, India.
It was founded by Mr.Vijay Shekhar Sharma in August 2010. It was the subsidiary of
One97 communications and started its journey as a prepaid mobile company.
Gradually, it diversified its portfolio of businesses to include almost every kind of digital

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transaction and further offered other services in the field of e-Commerce and e-Wallet.
Despite the company’s Indian origin, its largest investment came from a Chinese
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venture capital firm. Some of its other investors were also of foreign origin. It launched
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its initial public offer (IPO) in November 2021. Regardless of various features, the IPO
crashed and the investors lost faith in the company. The case is mainly emphasising the
IPOs issuing process, various reasons for the failure of Paytm IPO and suggestions to
improve their public offers.

Target Group
The target group of this case is students of MBA/MIFA/MFC/MS as a part of their basic
Financial Management course. The case will help the students to understand the various
ways of raising capital by corporations, examine the pricing issue involved in IPO, be
Aware of the difference between a public and a private issue, understand the IPO in the
context of Indian stock markets, look at the IPO in the context of a PSU, make aware the
students about the importance of SEBI guidelines regarding IPOs, examine the pros and
cons associated with the raising of capital through IPOs.

Learning Objectives
 To analyze the efficacy of the IPO process and associated concerns.
 To explore the challenges associated with issuing of IPOs.
 To comprehend the perspectives of different parties (SEBI, Investors, Organization
in the IPO process.
 To provide students with a basic understanding of the IPO valuation process.
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Time Plan

Time Topic of Discussion Key Take Away

Briefing of the case by the
How to summarize a case by focusingon
studentsduring the discussion
10 key factors mentioned in thecae
session

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Understanding the importance of
Different strategies to acquire
different methods to acquire funds (Pros
10 Fundsthrough the companies
and Cons)
Students will be able to find out different
Understand the process of
methods by which companies can offer
offeringIPOs
15 IPOs

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Students will be able to understand when
Understand the Difference
IPOs are offered it is traded in Primary
between primary markets and
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markets and after that in Secondary

10 Secondary market
Market
Understand the different
Highlight the various decisions by the
reasons forthe failures of the
10 company for the failure
IPOs
Summarize the key points and take into

Closing Remarks of case mind the company before launching the

10 public offers

Suggested Questions

Q1. Was Paytm right in its IPO method? Why or why not?
Solution:
Paytm is using a Dutch auction process for setting up the pricing of their IPOs. This is
the correct approach used by Paytm but the problem arises because of the evaluation
process. A Dutch auction process, otherwise called the opposite bid offering is a
framework wherein the cost of shares is determined by the most elevated asking value
the investors will offer for.

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The auction works with a high asking price for the situation from selling and brings down
it until it arrives at a value level where the bids will cover the whole proposition amount.
The whole deal is then designated on the last effectively assigned bid.

Q2. List the reasons for choosing the Dutch auction method.
Solution:
I. Mitigation in “Spike”: The "spike" addresses the contrast between the last

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proposition cost and the initial cost on the primary day of exchange. In the
commonplace IPO dissemination process, investment bankers decide the suitable
cost by giving "road shows" to potential financial backers, for example, huge
affluent clients and purchase side analysts of enormous mutual Funds. The
investment bankers attempt to measure the expected interest and value affectation

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focuses. Because of unveiling their valuing inclinations, these huge institutional
financial backers regularly are given the heft of the underlying designation of
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shares; subsequently profiting from the standard first-day value appreciation, which
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commonly has arrived at the midpoint of around 11%. This is an additional cost
to the company in addition to the underwriting fees typically charged by the
investment banker of 7%. By utilizing the Dutch auction technique the spike ought
to be significantly scaled down since from a certain perspective, the interest level
has as of now been measured and the cost has been shown up by the unregulated
economy instruments of interest and supply.
II. Association with Small investor: The process of Dutch auction empowers little
investors to partake on a level battleground with the institutional investors in the
evaluation by putting in a restrictive request showing the most extreme value that
one will pay and the complete number of offers they are keen on purchasing.
Consequently, it is intended to democratize the course of IPO share assignment.

III. Importance of an investment banker: Since the investment banks' job is

enormously lessened by righteousness that they are not engaged with the valuing of
the IPO, the cost is the base cost at which each of the offers can be sold; it limits
the impact of the financiers and subsequently makes the entire IPO process more
market-driven.

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Q3. Why do the Prices of the IPOs decrease drastically?

Solution:
I. Overpriced listing: The biggest factor leading to Paytm’s fallback in the stock
market was its excessively overpriced listing. Analysts and market experts have
been long pointing out the inflated valuation of the unicorn that turned out to be a
disaster recipe. The IPO was issued for Rs. 2,150 per share which was much
higher than the actual valuation of the company leading to losses? One97

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Communication, the parent company of Paytm, traded at 49.7 times its FY21
revenue. This was when the company wasn’t even recording any profits which
bring the reason for Paytm’s IPO debacle.
II. Bleak prospects of profitability: The company stands in a myriad of financial
troubles. Since its inception, Paytm has raised equity capital of a total of Rs. 190

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billion. It is a matter of grave concerns that 70 per cent of it, which translates to Rs.
132 billion, has been used to recover losses of the company. One after another, the
company has constantly been venturing into various business lines- payment
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wallet, commerce, investment, insurance, etc. Sadly, none of the business divisions
exhibits signs of strong financials. The company is burning cash with vague
prospects of profitability.
III. Questionable future of Paytm: Institutional investors have from time to time
expressed concern about the future of Paytm. And the frenzy is now more than
ever. One of the major reasons behind distrust is the absence of a license to enter
the lending business. Lending divisions are the most profitable source of revenue
for any FinTech. A company providing financial services has to have lending
vertical to be in the good books of analysts. Paytm, however, lacks the license to
enter this segment of the FinTech market.
IV. Increasing competition from UPIs: One of the success stories of the last decade,
Paytm has now been beaten by the other competitors in the market who have
outperformed the company’s numbers. While the consumers are adopting UPI
payments for easy direct bank transfers, Paytm is facing massive competition from
big sharks that are already more successful. The biggest threat for the company is
PhonePe which constitutes 42% of overall UPI transactions in the country. It is
followed by other big names such as Google Pay, BHIM and PhonePe together
constitutes more than 82% of the UPI market of India which has a lot to say about
Paytm’s future in this segment.

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V. Flawed analyses of the Paytm IPO: A report by Macquarie Research highlighted

a stark flaw in the analysis of Paytm’s valuation. The analysts on Thursday
revealed how the valuation of Paytm was decided by the foreign investors. Foreign
investors have a higher appetite for risks in the stock market, unlike Indian
investors who have conventional metrics of investment.

VI. When it comes to the Indian market, profitability and earnings is the top priority-

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the segments where Paytm stands no chance. According to experts, if Indian
investors are willing to buy Paytm shares in the future, one should decide to do
that only when the price come down to Rs. 1100-1200. This figure again is not
devoid of risks and investors should have an appetite for the same.

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Source: Author’s Compilation

Q4. What lesson does the company get from the failure of this IPO?
Solution:
I. Importance of compliances: It was Paytm due to which the SEBI had to change
its guidelines for issuing of IPOs. Therefore, the company should know the
importance of IPOs.
II. Timings of IPOs: One more point of view on the frustrating posting of the mother
of all IPOs is the terrible planning to list the organization. Unfamiliar institutional
investors are selling their securities from Paytm. According to organization
information, 18 plans from four shared assets poured Rs 1,050 crore into Paytm during the
Anchor Book building. One could be the emptying of liquidity out of the capital business
sectors.
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On October and November 21, the Nifty fell 840 focuses and for the greater part of
nowadays, Foreign Institutional Investors were sellers. Fully expecting a rate climb by the
central bank before long, FIIs are playing safe. Indeed, even Indian security markets are
indicating a rate climb. The Overnight Index Swap (OIS) is exchanging at 35 to 40 premise
focuses over the Reverse Repo pace of 3.4 per cent. In this way, security markets are
expecting rate climbs in India as well. By and large, loan cost climbs are viewed as a terrible
sign for light value markets.

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III. Size of IPO: The organization raised Rs 18,300 crore and the market doesn't have a
hunger for such a huge posting. Indeed, even asset streams in value common asset
plans have additionally declined for the beyond 90 days. So, with Foreign
Institutional Investors (FII) and Domestic institutional investors (DII) liquidity tap
gradually declining, a lukewarm reaction for such an enormous scope IPO was

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tremendously anticipated by market veterans. So, the organization should re-evaluate
the size of its IPO.
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Experience in using Case

This case can make the classroom experience more prominent and relatable for students.
Students will get a complete practical learning experience in the subjects such as
Investment Analysis and Portfolio Management and Financial Management. The
technicality of the terms used in this case will enable them to understand how IPOs are
working first in the primary market and then in the secondary market.

Students should also understand the methods for issuing shares like the Dutch auction
and the direct issuance. They need to learn basic terms related to the issuance of shares
before reading this case. They will also get to experience how BSE and NSE genuinely
work. This will enhance the understanding of the IPO evaluation process. Using the basic
data, they can identify the main hurdles faced by the company in the way of issuance of
IPOs.

Students can be acquainted with the importance of compliances to be followed while

issuing a public offering in the market. As the apt suggestions have been mentioned, this
case helps them to get rid of these problems.

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Background Reading

The audience must have an understanding of acquiring various sources of Finance,

especially IPOs. They must be aware of the SEBI guidelines related to issuing IPOs.
The readers should understand the primary market and secondary markets. They should
know how the companies can evaluate their share prices and various IPOs alternatives.
They must familiar with the concepts of Financial and Technical analysis of the financial

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markets.

The readers are advised to go through FinTech growth in India; the links of some of
theonline articles links are: -
https://bfsi.economictimes.indiatimes.com/news/FinTech/indias-FinTech-market-size-at-
31-billion-in-2021-third-largest-in-world-report/88794336

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https://www.businesswire.com/news/home/20211015005423/en/FinTech-Market-in-
India-2021-Report---ResearchAndMarkets.com
https://nasscom.in/knowledge-center/publications/FinTech-India-global-growth-story
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https://www.business- standard.com/article/companies/Indian-FinTech-market-poised-
for-multi-fold-growth-for- newer-biz-models-121091300030_1.html

References:
https://paytm.com/documents/ipo/paytm-red-herring-prospectus.PDF, SEBI.
https://www.investopedia.com
https://timesofindia.indiatimes.com
www.ibscdc.org
www.indianexpress.com
www.financialexpress.com
www.ibef.org
www.rbi.org.in
www.sebi.gov.in