Why did RBI impose a penalty of Rs 21 lakh on PhonePe?

The Reserve Bank of India (RBI) has imposed a monetary penalty of Rs 21 lakh on Walmart-owned PhonePe Limited for lapses in complying with regulations governing prepaid payment instruments (PPIs).

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The action, disclosed in an order dated September 10, follows a statutory inspection of the digital payments firm’s operations covering October 2023 to December 2024.

According to the RBI, PhonePe’s “end-of-day balance” in its escrow account fell short of the value of outstanding PPIs and merchant payments on certain days. The fintech also failed to promptly report the shortfall to the regulator, as required under the Payment and Settlement Systems Act, 2007.

After reviewing the company’s written and oral submissions, the central bank determined that the violation warranted a monetary penalty. The regulator clarified that the action relates to deficiencies in regulatory compliance and does not impact the validity of customer transactions or agreements.

The penalty comes as PhonePe, India’s largest player in the Unified Payments Interface (UPI) ecosystem with a 45.74% market share in August, prepares to go public.

The Bengaluru-based company has mandated Kotak Mahindra Capital, JPMorgan Chase, Citigroup and Morgan Stanley as bookrunners for its planned offering, expected early next year. Reports suggest the IPO could raise $1.2 billion to $1.5 billion (Rs 10,000–13,000 crore) at a valuation of $10-15 billion, with a mix of fresh shares and an offer-for-sale by existing investors such as Tiger Global and General Atlantic.

In parallel, PhonePe is conducting an employee stock option (ESOP) buyback program worth Rs 700-800 crore, with more than 1,000 employees eligible.

Financially, the company has narrowed its net loss by 29% to Rs 1,996 crore in FY24, compared with Rs 2,795 crore a year earlier, on the back of a 74% jump in operating revenue to Rs 5,064 crore.