India’s digital payments major Paytm had a shot in the arm when it raised US$1 billion through its latest round of funding, the largest amount raised by an Indian startup this year.

The company claimed on Monday that the funding was led by US-based asset management firm T Rowe Price, while existing investors Alibaba, SoftBank and Discovery Capital also participated in it.

Vijay Shekhar Sharma, who heads One 97 Communications, the parent company of Paytm, claimed the fresh round of funding was led by T Rowe Price, in which Chinese e-commerce major Alibaba’s subsidiary Ant Financial has pumped in $400 million and Softbank $200 million.

Discovery Capital, an existing shareholder in Paytm, also took part in this funding round, Press Trust of India reports.

Paytm plans to invest about $1.4 billion over the next three years to expand its financial services. It is planning to expand its digital payments business to the hinterlands. At present, the company serves merchants in more than 2,000 towns and cities across 650 districts. It aims to bring low cost mobile-enabled financial services to rural India.

“Paytm will invest 100 billion rupees ($1.4 billion) over the next three years to bring financial inclusion to more underserved users in the country,” the company statement said.

The new round of fundraising has lifted Paytm’s valuation to $16 billion, from $15 billion in August when some of its employees cashed out their shares in a secondary sale to unnamed New York-based investors. It is now the most valued startup in India.

Paytm raised $300 million from Warren Buffett’s Berkshire Hathaway in September 2018, valuing the company at $10 billion. This was the first primary investment round since then.

This takes the total investment raised by the company to about $3.5 billion. This is a rare bet for T Rowe Price, which manages more than $1 trillion in assets, on a privately held Indian technology startup, after its investment in Flipkart, owned by Walmart, the Economic Times reported.

The One97 chief claimed that certain businesses within Paytm, including payments and ticketing, were in the process of breaking even and the company was investing in newer business lines such as financial services and insurance, among others.

Eroding market share

Paytm had initially aimed to raise close to $2 billion, but trimmed the size of the round amid heated competition and widening losses in the digital payments segment.

After starting as a prepaid mobile recharge website in 2010, Paytm hit paydirt on November 8, 2016, when Prime Minister Narendra Modi made a controversial announcement banning high denomination currency notes.

For cash-starved people and traders, Paytm became the preferred alternative over other modes such as checks and credit cards. Soon its domination over the digital wallet space became formidable.

However, with the entry of Google Pay in 2018 and the takeover of Flipkart and its digital wallet arm PhonePe by Walmart in the same year, Paytm began feeling the heat.

The introduction of Unified Payments Interface, an instant real-time payment system developed by National Payments Corporation of India to facilitate inter-bank transactions, also took the sheen out of digital wallets, which involved multiple legs, including the transfer of money from a bank account to the wallet and then to the beneficiary.

While the acceptance of Unified Payments Interface began increasing among the Indian public, the dominant position of Paytm started eroding. On the other hand, the digital wallet market more or less stagnated.

This July Paytm clocked less than 140 million transactions on the interface, while Google Pay and PhonePe registered about 300 million transactions each. Paytm had about a 16% share of the total UPI transactions, while Google and PhonePe each had more than a 35% share.

For the financial year 2019, One97 Communications’ net loss had widened to 39.6 billion rupees ($552 million), as against 14.90 billion a year earlier. Its standalone revenue rose marginally to 33.19 billion from 32.29 billion in FY18. Other than Paytm, the company’s other businesses include Paytm Money, Paytm Financial Services, Paytm Entertainment Services and others.

SoftBank’s condition

Paytm’s existing investor SoftBank had reportedly imposed new conditions on the company before investing in this funding round. The Japanese group has stipulated that Paytm should go public within five years from the time of completion of the transaction, failing which SoftBank will have the right to sell its stake to a rival company. The Japanese investor holds a 19% stake in Paytm, while the Alibaba Group, through Ant Financial, owns 38%.

The Masayoshi Son-led group, which runs the $100-billion SoftBank Vision Fund, has now become tight-fisted about its investments after its recent WeWork fiasco. It had incurred a loss of $4.6 billion following a botched IPO plans of the office-sharing giant.

Son recently told his portfolio companies that they need to become profitable soon and stressed the importance of good governance. He said they should get in shape years before they consider going public. In India, apart from Paytm, SoftBank’s notable investments include ride-hailing company Ola and hotel aggregator OYO.