Shares of Paytm rose 5 per cent on Wednesday after India's payments regulator said the fintech company could sign new users for its key digital payments business, removing a key overhang since a central bank-ordered ban on its banking unit.

The country's financial regulator wound down Paytm's banking unit in January due to persistent compliance issues, which pulled down its monthly transacting users (MTU) to 70 million in the September-quarter from 100 million in the quarter before the clampdown.

The National Payments Corporation of India (NPCI) granted its approval following a request by the company in August, Paytm said on Tuesday.

"With NPCI approving new client onboarding, the path to the MTU revival is greatly cleared," said Rahul Jain, vice president of research at Dolat Capital.

Up to Tuesday's close, Paytm shares had lost around 10 per cent since the central bank clampdown on Jan. 31.

That included a 5 per cent drop on Tuesday after Paytm's second-quarter results showed it barely slowed its revenue decline as its digital payments user base dwindled.