11 Interesting Risk Insights From The Paytm Red Herring Prospectus

Bottom Line Up Front

• Company reports are a great source for vital information. Intelligence Analysts could receive insights from these reports which may otherwise not be readily available.
• In its Red Herring Prospectus, Paytm has detailed 79 risks which may impact its business, including the company's brand reputation.??
• COVID-19 has had the biggest financial impact on the company. Its revenue from commerce and cloud services declined by 38%. The primary reason for decline in Paytm’s GMV was due to disruptions to its partners in travel, entertainment and e-commerce industries.?
• Changing regulations in India leads to new compliance requirements, which increases Paytm’s costs.?
• A downgrade in India’s sovereign ratings impact’s Paytm’s ability to fund its growth. Around June 2020, India’s ratings were downgraded by Moody’s, Fitch and DBRS.
• Political, macroeconomic, demographic and other changes could adversely affect economic conditions in India; this in turn poses various risks to Paytm.
• A possible slowdown in the Chinese economy, strained relations between India and China, downgrade of sovereign ratings for Brazil and Russia, including the imposition of sanctions on Russia, is likely to affect Paytm’s growth.
• The company is vulnerable to a host of supply-chain risks such as strikes or shutdowns at delivery ports,? loss of or damage to products while in transit or storage,? property theft, losses due to tampering, issues with quality or sourcing control, failure by suppliers to comply with applicable laws,? intellectual property challenges, potential tariffs or other trade restrictions, security breach risks.?
• Dissemination of inaccurate information about Paytm could harm the company.?\
• Any sanctions imposed on entities based out of or connected with Myanmar (Burma) who may be conducting business directly or indirectly with Paytm may adversely affect the company.

Company Reports: A Source of Risk Intelligence

When performing risk intelligence, it’s assumed that an Intelligence Analyst needs to look at a plethora of sources. Sources which are credible. Company reports made publicly available are one such source which is of tremendous value.?

Documents such as Annual Reports, Quarterly Reports, Shareholder Letter, AGM Minutes, Memos etc provide valuable insights which otherwise may not be made readily available.?

Prior to going public, a company’s Red Herring Prospectus (RHP) is one such document which provides vital pieces of information which otherwise may not have been known. The company uses the RHP to apprise potential investors of information that must be made publicly available in accordance with the guidelines laid out by the local regulatory authorities.

One of the key sections in the RHP is Risk Factors. This section talks about both, Internal Risks and External Risks. These risks are discussed at great length. A number of important issues can be understood by studying the Risk Factors, a couple of them being:

1. Risks which the company clearly regards as potentially disruptive to its business
2. Potential areas where the company would be focusing its attention on from a risk management standpoint??

Recently, one of the biggest Indian tech companies to go public was Paytm. To the average Joe, Paytm is primarily a payment wallet but it’s much more than just a payment wallet. As Paytm has stated, they have offered payment services, commerce and cloud services, and financial services to 337 million registered consumers and over 21.8 million registered merchants as of June 30, 2021.???

In its RHP, PayTm talks about 79 risks. These risks are those which the company has clearly considered important enough to be made public knowledge.

For Intelligence Analysts however, there are 11 risks which are certainly noteworthy. These risks have been taken verbatim from Paytm's RHP. The primary objective is to highlight the significance of the type of risk insights that can be derived through such reports.

11 Interesting Risks

Risk 1: Changing regulations in India could lead to new compliance requirements that are uncertain.

Excerpts from RHP: The GoI has recently introduced (a) the Code on Wages, 2019 (“Wages Code”); (b) the Code on Social Security, 2020 (“Social Security Code”); (c) the Occupational Safety, Health and Working Conditions Code, 2020; and (d) the Industrial Relations Code, 2020 which consolidate, subsume and replace numerous existing central labour legislations.

Paytm’s view: We may incur increased costs and other burdens relating to compliance with such new requirements, which may also require significant management time and other resources, and any failure to comply may adversely affect our business, results of operations and prospects.

Risk 2:? The ongoing COVID-19 pandemic and measures intended to prevent its spread have had, and may continue to have, a material and adverse effect on our business and results of operations.

Excerpts from RHP: Lockdowns imposed as a result of the pandemic impacted our operations, in particular our commerce and cloud business.

Revenue from our commerce and cloud services decreased by 38.0% to ?6,932 million in FY 2021 from ?11,188 million in FY 2020.

Our Commerce GMV declined in FY 2021 primarily due to disruptions to our partners in travel, entertainment and e-commerce industries.

The travel industry declined by approximately 55% and movies declined by 88% compared to FY 2020 due to the various restrictions imposed as a result of the COVID-19 pandemic.

Paytm’s view: The extent to which the COVID-19 pandemic impacts our business, results of operations, cash flows and financial condition will depend on developments that continue to be highly uncertain and difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, the availability, distribution and efficacy of vaccines, and how quickly and to what extent normal economic and operating conditions can resume.

Even after the COVID-19 pandemic has subsided, we may experience material and adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, bankruptcies or insolvencies of merchants, and recession or economic downturn.?

Risk 3: A downgrade in ratings of India, may affect the trading price of the Equity Shares.

Excerpts from RHP: Our borrowing costs and our access to the debt capital markets depend significantly on the credit ratings of India. India’s sovereign rating decreased from Baa2 with a “negative” outlook to Baa3 with a “negative” outlook by Moody’s and from BBB with a “stable” outlook to BBB with a “negative” outlook (Fitch) in June 2020; and from BBB “stable” to BBB “negative” by DBRS in May 2020. India’s sovereign ratings from S&P is BBB- with a “stable” outlook.?

Paytm’s view: ?A downgrading of India’s credit ratings may occur, for example, upon a change of government tax or fiscal policy, which are outside our control. This could have an adverse effect on our ability to fund our growth on favorable terms or at all, and consequently adversely affect our business, cash flows and financial performance and the price of the Equity Shares.??

Risk 4: Political, macroeconomic, demographic and other changes could adversely affect economic conditions in India.?

Excerpts from RHP: Our business results depend on a number of general macroeconomic and demographic factors in India which are beyond our control. In particular, our revenue and profitability are strongly correlated to consumer discretionary spending, which is influenced by general economic conditions, unemployment levels, the availability of discretionary income and consumer confidence.

Recessionary economic cycles, a protracted economic slowdown, a worsening economy, increased unemployment, rising interest rates or other industry-wide cost pressures could also affect consumer behavior and lead to a decline in our sales and earnings.?

Paytm’s view: Factors that may adversely affect the Indian economy, and hence our results of operations and cash flows, may include:

• The macroeconomic climate, including any increase in Indian interest rates or inflation
• Any exchange rate fluctuations, the imposition of currency controls and restrictions on the right to convert or repatriate currency or export assets
• Any scarcity of credit or other financing in India, resulting in an adverse effect on economic conditions in India and scarcity of financing for our expansions
• Political instability, terrorism or military conflict in India or in countries in the region or globally, including in India’s various neighboring countries
• Occurrence of natural or man-made disasters
• Prevailing regional or global economic conditions, including in India’s principal export markets
• Other significant regulatory or economic developments in or affecting India or its consumption sector
• International business practices that may conflict with other customs or legal requirements to which we are subject, including anti-bribery and anti-corruption laws
• Protectionist and other adverse public policies, including local content requirements, import/export tariffs, increased regulations or capital investment requirements
• Inflation rates
• Being subject to the jurisdiction of foreign courts, including uncertainty of judicial processes and difficulty enforcing contractual agreements or judgments in foreign legal systems or incurring additional costs to do so.

Any slowdown or perceived slowdown in the Indian economy, or in specific sectors of the Indian economy, could adversely affect our business, results of operations, cash flows and financial condition and the price of the Equity Shares.

Risk 5: Financial instability in other countries may cause increased volatility in Indian financial markets.??

Excerpts from RHP: The Indian market and the Indian economy are influenced by economic and market conditions in other countries, including conditions in the United States, Europe and certain emerging economies in Asia.?

Economic developments globally can have a significant impact on India. Concerns related to a trade war between large economies may lead to increased risk aversion and volatility in global capital markets and consequently have an impact on the Indian economy.?

Following the United Kingdom’s exit from the European Union (“Brexit”), there remains significant uncertainty around the terms of their future relationship with the European Union and, more generally, as to the impact of Brexit on the general economic conditions in the United Kingdom and the European Union and any consequential impact on global financial markets. For example, Brexit could give rise to increased volatility in foreign exchange rate movements and the value of equity and debt investments.?

In addition, China is one of India’s major trading partners and there are rising concerns of a possible slowdown in the Chinese economy as well as a strained relationship with India, which could have an adverse impact on the trade relations between the two countries.?

The sovereign rating downgrades for Brazil and Russia (and the imposition of sanctions on Russia) have also added to the growth risks for these markets.

Paytm’s view: These factors may also result in a slowdown in India’s export growth.?

However, the overall long-term effect of these and other legislative and regulatory efforts on the global financial markets is uncertain, and they may not have the intended stabilizing effects. Any significant financial disruption could have a material adverse effect on our business, financial condition, cash flows and results of operation.

Risk 6: We rely on our suppliers and partners for our hardware, software and cloud and any impediment in procuring these in a timely manner and at competitive costs, or at all, may have a material adverse effect on our business, operations, financial condition, and cash flows.

Excerpts from the RHP: Since we depend on external suppliers for all our hardware requirements and some of our software requirements, this subjects us to risks such as:

• Currency fluctuations
• Climatic and environmental conditions
• Production and transportation costs
• Changes in domestic as well as international government policies
• Regulatory or trade sanctions
• Our manufacturers experiencing temporary or permanent disruptions in their manufacturing operations due to equipment breakdowns, labour strikes or shortages, natural disasters, component or material shortages, cost increases, insolvency, changes in legal or regulatory requirements, or other similar problems.

We are also susceptible to various other potential supply-chain risks, such as:

• Strikes or shutdowns at delivery ports
• Loss of or damage to our products while they are in transit or storage
• Property theft
• Losses due to tampering
• Issues with quality or sourcing control
• Failure by our suppliers to comply with applicable laws
• Any intellectual property challenges
• Potential tariffs or other trade restrictions
• Security breach risks
• Other similar problems could limit or delay the transit or supply of our products or harm our reputation.?

Paytm’s view:? Given all these possible risks, we could in the future experience product shortages or delays, and the availability of these products may be difficult to predict.

In the event of a shortage or supply interruption from manufacturers or suppliers of these components, we may not be able to develop alternate sources swiftly and cost-effectively, or at all.?

Risk 7: Our international operations involve risks that could increase our expenses, adversely affect our results of operations and require increased time and attention from our management.

Excerpts from the RHP: We have operations in a number of jurisdictions, including in Canada, Singapore, UAE, Malaysia, Tanzania, Uganda and Bangladesh, among others. We may be subject to risks inherently associated with international operations.

Our global operations expose us to legal, tax and regulatory requirements and violations or unfavorable interpretation by the respective authorities of these regulations could harm our business.

This might include difficulties in managing, growing, and staffing international operations, including in countries in which foreign personnel are, or may become, part of labor unions, personnel representative bodies or collective agreements, and challenges relating to work stoppages or slowdowns.

In addition, we may face competition in other countries from companies that may have more experience with operations in such countries or with international operations.

Paytm’s view:? Our international expansion plans may not be successful and we may not be able to compete effectively in other countries. These factors could impede the success of our international expansion plans and limit our ability to compete effectively in other countries.

Risk 8: Unfavourable media coverage could harm our brand, business, financial condition, cash flows and results of operations.

Excerpts from the RHP: Many social media platforms publish their subscriber’s or participant’s content, often without filters on accuracy. The dissemination of inaccurate information regarding our business, brand and services online could harm our business, reputation, prospects, financial condition and operating results, regardless of the information’s accuracy.

Paytm’s view: The damage may be immediate without affording us an opportunity for redress or correction.?

Risk 9: We rely on telecommunications and information technology systems, networks and infrastructure to operate our business and any interruption or breakdown in such systems, networks or infrastructure or our technical systems could impair our ability to effectively operate our platforms or provide our products and services.

Excerpts from the RHP: There was a temporary disruption and outage at a global internet infrastructure and content delivery network in late July 2021 which briefly impacted our Company’s website/ app as well as various other online platforms globally, due to which some of our services were temporarily impacted for a few hours overnight.?

Paytm’s view: Our success will depend upon third parties maintaining and improving internet infrastructure to provide a reliable network with adequate speed and data capacity and telecommunication networks with good quality of services and lower congestion.?

Risk 10: Any failure by us or our merchants and financial institutional partners who work with us to comply with applicable anti-money laundering, counter-terrorist financing and economic sanction laws and regulations could lead to penalties and may damage our reputation.

Excerpts from the RHP: In February 2021, in response to the coup in Burma, President Biden issued Executive Order 14014, authorizing the imposition of targeted sanctions against individuals and entities in Burma (Myanmar). Pursuant to the order, OFAC has added to its list of Specially Designated Nationals (“SDN List”) a number of individuals involved in or supporting the coup as well as several Burmese state-owned enterprises. In addition, the U.S. Department of Commerce Bureau of Industry and Security (“BIS”) has added a number of government agencies and other entities supporting the Burmese armed forces to its Entity List.?

Paytm’s view: Although we do not conduct any business, directly or indirectly, with any persons on the SDN List or Entity List, if additional sanctions are imposed, it is possible that they could have an adverse impact on our operations in Burma.

Moreover, even in cases where our Burma-related business would not violate U.S. law, potential investors could view such engagements negatively, which could adversely affect our reputation and commercial prospects.

Excerpts from the RHP: The policies and procedures we and our partners have adopted may not be effectively implemented in protecting our services from being exploited for money laundering, terrorist financing and other illegal purposes.

Paytm’s view: If we fail to comply with anti-money laundering, anti-terrorist and economic sanction laws and regulations, we will be subject to fines, enforcement actions, regulatory sanctions, additional compliance requirements, increased regulatory scrutiny of our business, or other penalties levied by regulators, and damages to our reputation, all of which may adversely affect our business operations, and results of operations.

In particular, if we were publicly named as a sanctioned entity by relevant regulatory authorities or become subject to investigation, our business may be significantly interrupted and our reputation might be severely damaged.

Similarly, if our partners fail to comply with applicable laws and regulations, it could disrupt our services and could result in potential liability for us and damage our reputation.?

Risk 11: Natural disasters, fires, epidemics, pandemics, acts of war, civil unrest and other events could materially and adversely affect our business.

Excerpts from the RHP: Natural disasters (such as typhoons, flooding and earthquakes), epidemics, pandemics such as COVID-19, acts of war, terrorist attacks and other events, many of which are beyond our control, may lead to economic instability, including in India or globally, which may in turn materially and adversely affect our business, financial condition, cash flows and results of operations.

Our operations may be adversely affected by fires, natural disasters and/or severe weather, which can result in damage to our technological infrastructure and generally reduce our productivity and may require us to evacuate personnel and suspend operations.

Any terrorist attacks or civil unrest as well as other adverse social, economic and political events in India could have a negative effect on us.

A number of countries in Asia, including India, as well as countries in other parts of the world, are susceptible to contagious diseases and, for example, have had confirmed cases of diseases such as the highly pathogenic H7N9, H5N1 and H1N1 strains of influenza in birds and swine and more recently, the COVID-19 virus. Certain countries in Southeast Asia have reported cases of bird-to-human transmission of avian and swine influenza, resulting in numerous human deaths.

Paytm’s view: Such incidents could also create a greater perception that investment in Indian companies involves a higher degree of risk and could have an adverse effect on our business and the price of the Equity Shares.

A worsening of the current outbreak of COVID-19 virus or future outbreaks of COVID19 virus, avian or swine influenza or a similar contagious disease could adversely affect the Indian economy and economic activity in the region and in turn have a material adverse effect on our business and the trading price of the Equity Shares.

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