NEW DELHI: Naspers-owned online payments service provider PayU has agreed to buy smaller Mumbai based rival Citrus Pay for $130 million (Rs 865 crore), striking one of the biggest deals in the country's emerging financial technology space and creating a new entity that will compete with Alibaba-backed Paytm , Snapdeal-owned FreeCharge and MobiKwik The all-cash transaction, due to be formally announced on Wednesday and close by the end of the year, is also expected to yield handsome cash returns to venture capital investors who backed the five-year-old company, a rarity in the Indian startup landscape. Sequoia Capital, the earliest backer of Citrus Pay, which had invested about $10 million and owned a 32% stake in the venture, is expected to earn a four-fold return on its investment, while Ascent Capital, which bought a 8% stake last year, has earned about $12 million, according to two people with knowledge of the deal. Other early investors in the firm include Japan’s Beenos and eContext Asia "The agreement enables PayU to quickly bring additional innovative financial services to market for its business and consumer customers," said Laurent le Moal, chief executive of PayU, terming the deal as "a significant milestone for both businesses and the fintech industry in India." The merged entity will process a forecasted 150 million transactions in 2016, worth a combined $4.2 billion, and will grow at over 50% annually, according to le Moal. It is expected to reach more than 20 million customers and over two lakh merchants.The Naspers-owned payments company will also continue scouting for further buyout opportunities after it completes the consolidation of Citrus Pay with its own operations, a process estimated to last for six months. Citrus Pay's managing director Amrish Rau will take charge of the merged entity, and as chief executive of PayU in India, he will report to le Moal. Co-founder Jitendra Gupta is expected to drive the company's foray into credit through Citrus Pay's Lazy Pay unit. Shailaz Nag , PayU cofounder, will focus on new areas of growth through new bank alliances, while co-founder Nitin Gupta will help complete the transition before leaving the company to pursue his entrepreneurial ambitions. Citrus Pay managing directors Gupta and Rau did not respond to queries from ET. In August, ET was the first to report that the parties were in the final stages of negotiations to close the deal. The company was founded in 2011 by former ICICI Bank senior executive Gupta and Satyen Kothari, with Rau coming in later as co-managing director.In December last year, the company hived off its mobile banking app Cube into a separate entity, with Kothari leaving to head the new startup. South Africa-based Naspers , which is also an early investor in India's most-valuable startup Flipkart , will invest a further $30 million-$40 million in Citrus Pay over the next few months, according to both sources quoted above. The Indian online payments industry is rapidly growing, attributed to a rise in smartphone usage and an active policy push to drive financial inclusion.Arecent Boston Consulting Group report estimated digital transactions will hit $500 billion by 2020, ten times the current level. Online marketplace Snapdeal 's acquisition of FreeCharge for an estimated $400 million-$450 million in April 2015 has so far been the largest deal in the Indian consumer internet space. For the Cape Town-headquartered Naspers, this is the second buy-out in India. In June 2013, its Gurgaon-based online travel venture Ibibo Group acquired online bus ticketing venture redBus for about $100 million.