By Vishes Kothari & Simran Jalan (firstname.lastname@example.org)
Major reforms are being proposed to the Payments and Settlement Systems Act, 2007 so as to be able to catch up with the fast changing payments landscape in the country.
An Inter-Ministerial Committee was constituted in October, 2017 to finalise the draft bill called the Payment and Settlement System Bill, 2018 and was comprised of representatives from the RBI, UIDAI, Department of Financial Services (DFS), Department of Electronics and Information Technology (DEIT), Department of Economic Affairs (DEA) and the Department of Legal Affairs (DLA). The Committee has recently submitted its recommendations.
The committee has proposed sweeping changes in the payments sector. The formation of Payments Regulatory Board (“PRB”), an independent regulator of the payments system distinct from the central bank is perhaps the most significant. This separates the regulation of payments from the functions of the central bank, The PRB is formed with the broad objectives of consumer protection, systematic stability, and resilience. It further aims to bring about competition and innovation. Moreover the Bill proposes to put banks and non-banks at par by making authorization criteria to operate payment and settlement systems ownership neutral.
Further significant changes include the introduction of the concept of designated payment systems and infrastructure systems. Both are discussed in detail below.
The Bill has 100 sections as compared to 38 sections in the existing Payment and Settlement Systems Act, 2007 (“PSS Act”).
Moving away from bank-centric payment systems
Payments are transfer of monetary value from a person to another either for consideration of goods and services or merely a transfer. Traditionally, the field of payments have been bank driven. However, with the rapid development in technologies there has been a growth in demand for digital payments making it a distinct industry. This has led to formation of new business models giving rise to formation of new payment solutions. Therefore, it is evident that it is no longer necessary to be a bank to provide payment solutions.
With the introduction of digital wallets like PayTm, Freecharge, etc. and social payments integrated with chat and social media, there has been an evolution in the payment systems. The National Payment Corporation of India (NPCI) operates inter entity payment systems like Immediate Payment Services which is not a bank. These non-banking payment systems have emerged as significant players in a relatively short time frame. This growth of non- banking payment systems are at a nascent stage and needs to be nurtured so that the banks face competitive pressure to innovate and non-banking payment systems enjoy equal opportunity to compete in the payment industry. A more inclusive regulatory design is likely to further promote competition and as a result help improve access, safety and convenience related to payments and help reduce transaction costs. It may also lead to more innovation in the payment solutions.
Further, the transfer of powers from the RBI to PRB is done to make the regulator independent of the central banking functions so that it can look after how the payment systems operate to foster competition, consumer protection and reliance in payments sector. It is important to distinguish the role of the Central Bank as an infrastructure institution providing settlement function from its role as a regulator of the payment sector. It is this role of the regulator which needs to evolve from being largely bank centric.
Objections by RBI and DFS
The Payment and Settlement System Act, 2007 was the first dedicated law to regulate the payment systems in India and it gave powers to regulate and supervise the payment systems to RBI. This Bill proposed the formation of PRB which will be an independent body to supervise the payment systems. The RBI suggested that the PRB should be under RBI and the chairperson of PRB should be the governor of RBI. This would retain the powers of RBI to monitor the payment systems. However, this suggestion from the RBI has not found any support within the Committee. Instead, the Committee analysed the suggestions of RBI and incorporated section 10 in the Bill which provide RBI with the powers to make reference to PRB to consider any matter which is important in the context of monetary policy. The Bill envisages a formal mechanism for coordination between PRB and RBI.
The DFS suggested that the Bill should explicitly provide for government ownership of atleast 51% in the NPCI. This would ensure that NPCI is not owned by banks as it is a key payment infrastructure. Further, the DFS also suggested that the Central Government should have powers to appoint atleast two nominee directors in PRB. The Committee analysed the suggestions of DFS and decided that it may not be advisable for government to get ownership of payment systems. It incorporated additional requirements for infrastructure systems. The Bill proposed that the PRB can restrict the ownership levels of banks and non-banks in the infrastructure institution.
Composition of PRB:
|A Chairperson||Central Government in consultation with RBI|
|A Deputy Chairman||By Central Board of RBI, not below rank of Executive Director, ex-officio|
|One officer||By Central Government, not below the rank of Joint Secretary, ex-officio|
|Two whole-time members||By Central Board of RBI|
|Two whole-time members||By Central Government|
Snapshot of Powers of PRB:
- Power to grant authorisation for operating payment and settlement systems is with PRB. The application of authorisation is to be made to the PRB.
- In the PSS Act, 2007 applications for licences are made to RBI.
- The PRB, before issuing authorisation, has the power to make inquiries and if satisfied, after making inquiry, may issue an authorisation in writing. It may even refuse the application by passing a reasoned order.
- The PRB can, by a reasoned order, revoke the authorisation given to a system provider if such system provider contravenes the provisions of this Ac
- A person, who is authorised to commence operation of payment system by PRB, may file an application to the PRB to seek temporary exemption from any specific regulation issued under this Act.
- The person granted exemption shall file a report at the end of their exemption period and the PRB shall examine the same. It may even revoke the exemption on reasonable grounds.
- PRB has the power to determine the format of payment instructions, the timings to be maintained by payment systems, manner of transfer of funds and other standards.
- In the PSS Act, 2007, the RBI has the powers to determine standards.
- It can further impose common standards or mandate payment systems to require interoperability with other payment systems.
- If a payment system refuses to provide access to a person, then such person may make an application to the PRB.
- PRB has the power to investigate, appoint observer, conduct search and seizure and intimate a remedy in the form of private warning, public statement, declaring an entity not fit and proper and disgorgement orders.
Additions to the Regulatory Structure
The Bill recognizes the risk based regulatory framework. This is achieved by recognition of designated payment systems, infrastructure payments systems and settlement institution.
Designated Payment Systems
The Payment Regulatory Board (PRB) may, by an order in writing, designate a payment system as a designated payment system if it is satisfied that:
- A disruption in the payment system could cause further disruption to the system participant or system disruption to the financial system of India, or,
- A disruption in the operation of the payment system could affect public confidence in payment systems of India, or,
- Otherwise in the interest of the public to do so.
The PRB shall specify the criteria to evaluate if the aforesaid conditions are satisfied by the payment systems based on its market share, degree of interdependency with other entities, number and type of system participants, volume and value of transactions and the available alternatives to use the payment system at a short notice.
The PRB shall publish an order immediately after it has designated any payment system and forward the same to RBI and Central Government. It shall review atleast once in a financial year the applicability of criteria to the designated payment system and accordingly it may amend or revoke such designation order.
The Bill proposed that the PRB will have additional powers on the designated payment systems with respect to:
- Authorisation, supervision, consumer protection, rights and duties of system provider,
- Power to appoint observer in public interest,
- Power to specify the basic features of bye-laws and approval of such bye-laws, and
- Power to take specific regulatory actions in case of insolvency of a designated payment system.
The PRB shall make a reference to the RBI when it proposes to designate any payment system as a designated payments system. On receipt of the reference, the RBI shall give opinion to the PRB within 21 days of the receipt of such information. The PRB shall take into account the opinion submitted by RBI or if it disagrees with the recommendations of RBI then it shall give RBI a statement in writing with reasons for disagreement.
Infrastructure Payment Systems
As per the Bill, “infrastructure system means a-
- payment system to effect payment between other payment systems;
- designated trade repository;
- central counterparty;
- settlement system; and
- any other system notified by the Central Government.”
The infrastructure payment systems are deemed to be the designated payment systems and the additional oversight applicable to the designated payment systems applies to such systems.
Additional requirements for infrastructure systems have been provided in the Bill to enable the PRB to restrict the ownership level of banks and non banks. An infrastructure institution shall ensure that its ownership and governance structures give precedence to the interests of the consumers over profit making motive of the infrastructure institution.
The PRB may specify the following criteria:
- the maximum ownership interest that can be held by a class or classes of persons in an infrastructure institution;
- the manner of calculating the ownership interests of different classes of persons in an infrastructure institution;
- the requirement to have independent members on the governing body of an infrastructure institution; and
- the requirement to have a representative or class of representatives of consumers availing of the services provided by the infrastructure institution, on the governing body of an infrastructure institution.
The proposed Bill further recognises the role of RBI as an operator of core payment system and settlement system as an infrastructure institution. But it exempts RBI in its role as an infrastructure institution from fulfilling the ownership and governance structure as specified above by the PRB.
As per the Bill, “settlement system means a system which provides ‐
- accounts to the system participants to hold funds or facilitates system participants to hold funds; and
- settlement between the system participants.”
Banks and Non-Banks at par
The Inter-ministerial committee has proposed to bring parity between banks and non-banks. The Bill provides that the authorization criteria should be risk based and ownership neutral for different classes of payment systems. It does not differentiate between banks and non- banks. It recognises designated payment systems including infrastructure systems as requiring additional oversight and provides for such oversight.
The PRB shall determine appropriate risks while determining the authorisation criteria including risks associated with the following factors:
- operational reliability and scalability;
- business continuity and resilience;
- safety of consumer funds; and
- money‐laundering and terrorism financing.
Further important provisions of the Bill
Authorisation of Payment Systems:
The Bill defined payment systems as:
“payment system means a system that enables payment to be effected between a payer and a beneficiary, involving payment service, clearing or settlement or all of them;”
Further, Schedule 1 of the Bill provides the following list of the payment transactions and services that shall not constitute a payment system requiring authorisation and are excluded from the definition of payment system:
- Payment transaction through a commercial agent on behalf of the payer or payee. This exemption is provided only if the agent acts in behalf of the payer or payee, regardless of whether they are in possession of client funds or not. But if an agent acts on behalf of both payer and payee, then we check whether they are in possession of the client funds or not. The exemption is granted only if they are not in possession of the client fund.
- Payment transaction by a provider of electronic communications networks or services provided in addition to electronic communications services for a subscriber to the network or services performed using electronic device.
- Any service provided y a technical service provider which supports the provision of payment services, where the provider does not at any time enter into possession of the money to be transferred.
- Prepaid payment instruments issued by a person for facilitating the purchase of goods or services from that person only without permitting cash withdrawal.
- Payment transactions carried out between system providers, or their agents or branches, for their own account.
- Payment transactions between holding, subsidiary and associate companies.
- Any other payment system as may be specified in interests of efficient operation of payment systems, the size of any payment system, efficient use of payment service or for any other reason.
Granting of Exemption:
A person authorised to operate as a payment system may file an application to the PRB to seek temporary exemption from any specific regulations issued under the Act. PRB may grant exemption for a period of 6 months and it may provide a further extension for a period not more than 6 months. Prior to granting exemption, PRB shall take the following considerations into account:
- such exemption is essential to test a proposed payment service or payment system;
- the proposed payment service or payment system is a genuine innovation;
- the proposed payment service or payment system has potential to benefit consumers in India;
- such exemption is not likely to compromise financial stability and interests of consumers in India;
- after the expiry of the temporary exemption, the proposed payment ser‐ vice or payment system is likely to be deployed on a broader scale in India; and
- such other criteria as may be specified from time to time.
Further, the PRB, while granting exemption may state the conditions subject to which the exemption shall be given.
The PRB, may take, one or more enforcement action, by an order in writing, against a person if such person fails to comply with the conditions subject to which authorization was granted to him or fails to produce or furnish any documents or violates any applicable provisions or orders or directions under this Act or attempts to disrupts the normal functioning of a payment system.
The enforcement action constitutes:
- issuance of a private warning;
- issuance of a public statement;
- requiring a person to correct a violation;
- imposition of a monetary penalty
- issuance of a disgorgement order; and
- declaring a person to be not fit and proper person
For determining whether any enforcement action should be taken, the PRB shall appoint such adjudicating officers for holding an enquiry.
The adjudicating officer so appointed by the PRB shall have the following powers:
- Power to issue disgorgement order– in case when a person has made profit or averted loss by indulging in any activity in contravention of this Act.
- Any enforcement action to be taken by the PRB– It shall consider the following factors while determining the enforcement action to be taken against a person:
- The nature and seriousness of action
- Consequence/impact of the action
- Conduct of the person upon the discovery of the occurrence of the action
- Repetitive nature of the action.
3. Power to issue a show‐cause notice – The show cause notice will be issued against the person whom it proposes to take enforcement action. Such notice shall be in writing and shall provide the noticee atleast 21 days to make representations.
4. Power to issue discontinuance notice – The discontinuance notice is given in writing to the concerned person, within a reasonable period of time, if it decides not to take an action proposed in a show cause notice.
The Payments Regulatory Board shall make necessary regulations in relation to disgorgement order, including‐
- the procedure for claiming amount under this section by persons suffering a loss;
- the time‐period within which such amount may be claimed; and
- other matters incidental to enable the PRB to pay from the amount so received.
Principles for consumer protection:
The PRB is proposed to be formed with one of its objectives being protection of the interests of the consumers. It would also ensure safety and soundness of the payment systems. Further, the independent regulatory board is expected to increase the trust and confidence of the consumers in the payment systems.
The PRB shall consider and balance the following principles:
- the level of protection required for a consumer may vary depending on the following,‐
- the level of knowledge, experience and expertise of the consumer;
- the nature and degree of risk embodied in the payment service by the consumer; and
- the extent of dependence of the consumer on the system participant.
- any obligation imposed on a system provider or a system participant should be reasonably commensurate with the anticipated aggregate benefits for consumers.
Protection of funds collected from consumers:
PRB shall make regulations so as to impose adequate obligations on system provider to ensure protection of funds of persons using the payment system. While making a regulation, the PRB shall consider the necessity for the system provider to-
- place the funds in a separate account that it holds with a bank;- These funds shall not be utilized for any purpose other than discharge of liabilities arising on account of usage of payment systems by customers or for repaying to the customers.
- invest the funds in such secure, liquid assets as may be specified;
- maintain the funds in a separate account as may be specified;
- any other mechanism as it may deem fit.
Dishonour of electronic funds due to insufficiency of funds in the account:
If an electronic funds transfer has been initiated by a person from his account on the grounds of insufficiency of funds, such person shall be deemed to have committed an offence and shall be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the electronic funds transfer, or with both.
This section has been inserted in the Bill to bring in parity with section 138 of the Negotiable Instruments Act.
The Bill proposes to repeal the PSS Act, 2007. If implemented, it will bring a major change in the payment industry by shifting the powers from the hands of RBI to the hands of PRB. The PSS Act, 2007 gave RBI the powers of authorisation, revocation, investigation, etc., which now been passed to the PRB.
This shifting of powers has been deemed necessary because it was observed that central banks deal with matters of systematic importance only and their main aim is to promote financial stability. The Committee said that the regulation of payments largely relates to regulate the market conduct of the operators. The central bank, however, would ignore the consumer interests which may be best achieved by creating an independent regulatory regime which would enable a healthy competition in the payments industry without endangering the financial stability.
This Bill envisages the growth of the non-banking payment systems. It has been recommended by the committee to place the Bill before the Union Cabinet along with their report.
You may further read our Article on Foreign Entities getting into payment systems in India.