PhonePe IPO: 100% OFS, continued losses and regulatory scrutiny in focus

As PhonePe prepares for its public market debut, the alignment between shareholder exits and business needs comes into focus. Walmart, the US retail giant and controlling shareholder, is set to monetise part of its holding through an IPO structured entirely an Offer for Sale. The listing offers liquidity to existing investors, even as the company continues to post losses and operate under close regulatory supervision.

According to the Draft Red Herring Prospectus (DRHP), Walmart holds 71.77% of PhonePe prior to the offer, giving it effective control over the company that it got as part of the $16 billion deal to buy Flipkart back in 2018. Phonepe emerged as the silver lining in an otherwise expensive deal that is yet to start paying back to the new owner. Mainly on the basis of the high, leading market share it has enjoyed in the UPI space. This perception was further heightened by Paytm’s $20 billion valuation during its IPO in 2021, with a much lower market share as compared to Phonepe. 

That was probably a strong reason why Walmart shifted PhonePe from Singapore to India at a cost of $1 billion in taxes in 2022. However, things haven’t exactly gone to plan for either firm, as making an actual profit has been remarkably difficult despite the massive user bases. Paytm has become profitable now, PhonePe is not even close.

Adding to this is the way the planned IPO has been structured — a 100% Offer for Sale (OFS), meaning PhonePe itself will not receive any proceeds from the listing. All funds raised will go directly to existing shareholders. The company has also disclosed that no portion of the IPO proceeds will be used for technology upgrades, compliance investments, balance-sheet strengthening, or growth initiatives.

The founders of the company, Sameer Nigam and Rahul Chari have low shareholding and haven't taken the promoter tag.

Public investors are effectively being asked to evaluate the company based on its current operating profile, without the cushion of fresh capital to support the next phase of expansion or resilience.

Responding to a pointed question on the 100% OFS, a PhonePe spokesperson said, “Based on the DRHP numbers, you will notice that we generated free cash flow in FY25, and even this year our burn is minimal. We also have a very healthy balance sheet, so we do not need additional capital to fund our growth ambitions.”

Walmart is not the only shareholder seeking liquidity. Other global investors, including Microsoft and Tiger Global, are also participating as selling shareholders. The simultaneous monetisation by multiple US-based investors points to a coordinated reduction of exposure.

On the operating front, PhonePe’s revenue has continued to grow, but the pace has moderated. As per the DRHP, revenue growth was reported at around 22% in H1 FY26. At the same time, PhonePe continued to report significant losses, which stood at Rs 1,444 crore. Along with this, NPCI has also been discussing UPI volume caps  (e.g., 30% cap for one player) to prevent market dominance, which could limit future growth.

The governance and compliance disclosures in the DRHP add further context to the story. RBI inspections conducted over multiple periods flagged operational and control-related issues in the company’s payments business. These included gaps in escrow account maintenance, with balances at times falling below outstanding prepaid payment instruments and merchant dues, as well as PPI-related lapses such as multiple PPIs being issued against the same officially valid document, leading to breaches of loading limits.

The regulator also pointed to deficiencies in KYC and customer due-diligence processes, including delays in periodic KYC updates across risk categories and deviations in video-based customer identification procedures. In addition, weaknesses were noted in operational controls, covering areas such as grievance redressal reporting, transaction monitoring, and regulatory filings.

PhonePe has stated that it has taken corrective steps, including system changes, revisions to standard operating procedures, and contractual amendments. However, the DRHP indicates that some regulatory submissions were still under review and awaiting closure as of the filing date.

According to a firm spokesperson, the RBI conducts annual risk-based on-site inspections across all regulated entities, including fintech firms, and such reviews are not specific to PhonePe. “PhonePe has responded to all recent findings within the stipulated timelines, with all corrective actions successfully implemented and closed internally,” the spokesperson said.

Taken together, the IPO structure, the reduction in exposure by US-based investors, the slowdown in growth, and continued regulatory oversight raise questions around the listing. The decision by global promoters and investors to monetise at this stage, while the IPO does not involve fresh capital for expansion, compliance or balance-sheet strengthening, is likely to be closely examined by public market investors