SoftBank tests India's taste for foreign finance

MUMBAI: India's digital payments champion Paytm is testing the country's appetite for foreign financing. Its parent, One97 Communications, just welcomed $1.4 billion of investment from SoftBank, the Japanese group led by Masayoshi Son. The trick will be to square that with rules requiring local control of payments businesses. Luckily, China's Jack Ma, a large existing investor, is an expert in pushing those kinds of boundaries.

SoftBank will now be the biggest investor in One97, alongside Ma's e-commerce group Alibaba, and its affiliate Ant Financial, which together owned roughly 40 percent as of December. The deal puts One97's valuation at $7 billion - an impressive increase of 40 percent in just five months on the back of Prime Minister Narendra Modi's shock move to cancel banknotes.

Most of that $7 billion is accounted for by the payments business, which now boasts more than 220 million users. Yet One97 only owns a 49 percent stake in it. Founder Vijay Shekhar Sharma owns the rest, fulfilling local rules that require an Indian national to control licences for so-called Payments Banks.

Paytm says that, to grow, it will invest an amount just slightly more than SoftBank's total infusion over the next three to five years. But that presents a puzzle. Paytm's minority owner is putting in lots of new investment, but can't increase its stake. Technically, that should only be possible if the Indian owner matches the commitment, which seems a stretch given Sharma's humble stature relative to SoftBank's.

Sharma may have learnt a few tricks from Ma. Chinese internet companies have for almost two decades used clever legal structures to circumvent rules on foreign investment. Payments and finance, though, are where things tend to get most tricky. Similar restrictions to India's prompted Ma to whisk his payments business out of Alibaba to keep regulators happy back in 2011. The structure of One97 and Paytm may attract closer scrutiny.

That may not be a huge problem. Modi badly wants to accelerate digital payments, which will help the country to reduce corruption and increase tax revenues. India has some homegrown solutions but these are not yet as good, and the country needs foreign capital if it wants to take the fast track. Son and Ma are the ideal people to test how far India is willing to bend.