Paytm must explain cash needs- IIAS

Proxy advisory firm IIAS has said the board of One97 Communications, owner of Paytm, should explain how it can manage with less cash after the buyback, when just a year back it raised money to fund its growth strategy.

“We expect that the board raised Rs 8,100 crore in net IPO proceeds after factoring its existing cash. Therefore, its growth strategy a year ago required funding support that was in excess of the IPO proceeds. What has changed for the board to believe that its current liquidity is sufficiently in excess that it can be returned to shareholders?” the firm wrote in a note.

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The board of One97Communications meets on Tuesday to discuss the buyback. On Monday, the Paytm stock closed lower by 3.1% at Rs 528.10, way below its IPO price of Rs 2,150. The company, backed by Ant Group and Softbank, had cash and equivalents of Rs 9,180 crore at the end of September.

Buybacks are generally used as tax-efficient instruments to return excess cash to shareholders. They signal that the company is generating strong cash flows that are more than required to maintain the growth trajectory. “In Paytm’s case, the company continues to report cash losses annually. Therefore, the buyback is essentially a return of equity capital to its shareholders,” analysts said.

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IIAS analysts said it was unclear if the size of the buyback would be sufficiently meaningful to move the needle. Unless the buyback price announced by One97 Communications is higher than the IPO price of Rs 2,150, the buyback would favour pre-IPO shareholders and employees.

Employees have been issued stock options at a significant discount to market price. The founder, Vijay Shekhar Sharma, was granted 21 million stock options at Rs 9 in FY22, IIAS pointed out. In contrast, those shareholders who bought shares in the IPO at a price of Rs 2,150 would view the buyback unfavourably.