Report: No FEMA Violations Found in Paytm Payments Bank Case

“The Enforcement Directorate (ED) has launched a preliminary inquiry into Paytm Payments Bank following the Reserve Bank of India’s decision to prohibit the subsidiary from accepting new deposits starting February 29.

The Enforcement Directorate (ED) conducted an inquiry into Paytm Payments Bank Limited (PPBL) transactions and found no violations under the Foreign Exchange Management Act (FEMA). However, the Reserve Bank of India (RBI) still has the authority to take action against other instances of alleged non-compliance. The ED initiated a preliminary inquiry against Paytm Payments Bank following the RBI’s decision to prohibit the subsidiary from accepting new deposits starting February 29. This action by the ED comes amid regulatory scrutiny surrounding the operations of Paytm Payments Bank, suggesting ongoing concerns regarding compliance and regulatory standards.

On January 31, the Reserve Bank of India (RBI) issued a circular that directed Paytm subsidiary PPBL to discontinue accepting additional deposits, top-ups, or conducting credit transactions in its customer accounts, wallets, FASTags, and National Common Mobility Cards (NCMC) beyond February 29. This directive was likely issued due to regulatory concerns or compliance issues with PPBL’s operations.

However, on Friday, February 16, the RBI extended the deadline for compliance to March 15. This extension could have been granted to allow PPBL more time to address any regulatory issues, implement necessary changes, or come into compliance with RBI regulations.

The Reserve Bank of India (RBI) stated that the action taken against PPBL was based on the findings of the Comprehensive System Audit report and a subsequent compliance validation report from external auditors. These reports revealed “persistent non-compliances and continued material supervisory concerns” within the bank, prompting the RBI to take further supervisory action.

The Enforcement Directorate (ED) was assigned the responsibility of investigating the financial transactions under scrutiny. The ED probes alleged violations or crimes under the Foreign Exchange Management Act (FEMA) and the Prevention of Money Laundering Act (PMLA).

Earlier, the Enforcement Directorate (ED) had interrogated senior Paytm officials and obtained documents from them following the Reserve Bank of India’s (RBI) action against Paytm Payments Bank. The Paytm executives provided certain documents and were subsequently questioned by the authorities.

Sources cited in the report indicated that no scheduled offences under the Prevention of Money Laundering Act (PMLA) were implicated in the case of PPBL. Therefore, the ED concluded that a money laundering investigation could not be pursued. A government official explained that without the commission of a crime, there is no generation of ‘proceeds of crime,’ and thus, the PMLA does not apply in this scenario. Consequently, the ED focused on examining the transactions to ascertain if any violations occurred under the provisions of the Foreign Exchange Management Act (FEMA).

In a regulatory filing, Paytm’s nodal company, One 97 Communications Limited, stated that neither its subsidiaries nor its associate, Paytm Payments Bank Limited, engage in Outward Foreign Remittance. The filing clarified that Paytm Payments Bank Limited does not undertake such transactions. Additionally, the filing mentioned that One 97 Communications Limited and its subsidiaries and associate have received notices and requests for information from authorities, including the Enforcement Directorate (ED), regarding customers who may have conducted business with the respective entities. The filing affirmed that the companies provided the necessary information, documents, and explanations to the authorities in response to these inquiries.

In a move aimed at providing relief to customers, the Reserve Bank of India (RBI) has extended the deadline for Paytm Payment Bank customers to make deposits and credit transactions until March 15. According to an official document, “No further deposits or credit transactions or top-ups shall be allowed in any customer accounts, prepaid instruments, wallets, FASTags, National Common Mobility Cards, etc. after March 15, 2024 (extended from the earlier stipulated timeline of February 29, 2024), other than any interest, cashbacks, sweep in from partner banks, or refunds which may be credited anytime,” as stated by the RBI.

One97 Communications, the parent company of Paytm, revealed on Friday that it has transferred its nodal account from Paytm Payments Bank to Axis Bank. This strategic move, disclosed in a recent regulatory filing, is aimed at ensuring the uninterrupted operation of essential services such as the Paytm QR functionality, Soundbox, and card machine infrastructure beyond the March 15th deadline set by the Reserve Bank of India (RBI).

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