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New Delhi: Ant Financial Services Group, an affiliate of China’s largest e-commerce firm Alibaba Group Holding Ltd, has agreed to buy a 25% stake in One97 Communications Ltd, which owns mobile payment platform Paytm, in a move to tap the mobile payments business in a market where the lines between telcos, banks, retailers, and so-called e-wallet companies such as One97 are set to blur.

The companies did not disclose the value of the transaction. Two people familiar with the investor’s plans said it may purchase a controlling interest in One97 two years down the line, contingent to Paytm meeting certain performance milestones. Neither of the two wished to be identified.

Vijay Shekhar Sharma, founder and chief executive of One97, said he and SAIF Partners continue to remain the majority shareholders in the company with close to a 65% stake, and that he wouldn’t like to sell the company.

The deal comes soon after One97 applied to Reserve Bank of India (RBI) for a payments bank licence which will allow it to offer basic savings, deposit, payment and remittance services to customers.

Ant Financial, which also runs Alipay Wallet, the largest mobile payment service provider in China with over 190 million users, will also provide Paytm with strategic and technical support for its business. This is Ant’s first investment in India and the deal is expected to close in the next three months.

Paytm will use the funds to grow its mobile payments ecosystem and boost its e-commerce user base, the local firm said in a statement. It will also expand its team to 5,000 employees from 2,000.

“With over 1 billion people, India’s payments market has vast untapped potential," said Cyril Han, vice-president of Ant Financial. “As smartphone use continues to rise in India, we see great opportunity in the mobile wallet space and Paytm, as a leader in this field, is best equipped to build a mobile payments ecosystem in the country."

As growth in China slowly starts to taper, e-commerce giant Alibaba is looking at newer growth avenues.

Alibaba’s interest in Paytm also underscores the paucity of payments solutions providers in India. No e-commerce firm in the country has its own payments service and the e-commerce market largely works on cash on delivery. Last year, Flipkart closed its payment gateway PayZippy barely a year after launching the service.

According to Vineet Toshniwal, managing director of Equirus Capital, “Alibaba already has a leg into e-commerce (for consumers) via Softbank and it will further create an ecosystem in India via acquisitions."

Softbank, which has close to 32% stake in Alibaba, bought into Indian e-commerce company Snapdeal by acquiring a 33% stake for $602 million.

Alibaba itself has also been operating in India since 2010 via its e-commerce marketplace for businesses.

“India’s is an SME (small and medium enterprise) economy much like China and Alibaba will replicate the China strategy here," he added.

Beyond China, Ant Financial also has a presence in Southeast Asia and the US. The company offers a range of financial services in China including mobile wallets, mobile payment apps and a money market fund. It was also granted approval in September last year to open a new private bank, according to a Reuters report.

During the Singles’ Day promotion in China on 11 November 2014, Alipay Wallet processed nearly 200 million mobile payments within 24 hours.

Ant Financial and Paytm will build on synergies in the mobile wallet space to offer Indian consumers comprehensive products and services and tap the significant potential of the India mobile payments market, the firms said in a statement.

According to Sharma of One97, Paytm could look at many more services over the due course of time. “We will love to do much more than mobile wallets... whatever RBI permits," he added.

The company expects to power 100 million mobile wallets by 2016, up from 20 million currently.

“I believe that together we will change the landscape of mobile payments and commerce in our country," said Sharma.

Paytm, which started out in 2010 as a mobile recharge and bill payment service, now also offers wallets and other electronic payment services. In 2014, the company launched a full marketplace on its mobile app, betting that it could convert some of its large customer base of 22 million people into shoppers for mobile phones, tablets, laptops and other products.

It currently does 800,000-1.2 million daily recharge transactions on its platform and close to 25 million orders a month. The Paytm mobile wallet is used by more than 23 million users to pay for various services.

“Paytm will not only get access to a sporadic fund-led growth but will also provide them with the much needed fillip to scale-up their operations. Along with the funding, we will also bring our technical and operational expertise as well as experience of working in a global market like China, which will provide them with an international exposure," an Ant Financial spokesperson said.

Citi Group and Goldman Sachs were financial advisers to the deal. Simpson Thacher and Bartlett LLP, Trilegal and Amarchand and Mangaldas & Suresh A. Shroff and Co. acted as the legal advisors. KPMG served as diligence advisor on this transaction.

Ant Financial might eventually end up picking a larger stake in Paytm over the years. “We are open to options but for now the focus is strategic partnership, I think it is bit early to talk about it," the spokeswoman said.

According to research firm IDC, India is the fastest growing smartphone market in Asia Pacific with about 72.5 million units sold in the third quarter of 2014, a 15% quarter-on-quarter growth.

India’s online payments industry is also witnessing a compound annual growth rate of 50% over 2007-2014.

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