The Supreme Court Aadhaar Verdict- Major blow to Fintech Companies

By Simran Jalan (simran@vinodkothari.com)

Introduction

The Supreme Court announced a landmark ruling in the case of Justice K.S. Puttaswamy (Retd.) & Anr. V. Union of India, W.P. (Civil) 494/2012 dated September 26, 2018.[1] (“Aadhaar Verdict”), the one which the entire country was looking forward to, relating to the constitutional validity of the Aadhaar card and the Aadhaar Act. Since the very introduction of Aadhaar card, there have been innumerable applications against the same, however this ruling rests each of those.

One of the major highlight of the ruling is that the same has partially quashed section 57 of the Aadhaar Act, which dealt with use of Aadhaar by private companies or bodies corporate. This has posed a lot of operational difficulties of the startups especially the fintech startups and in this write up we intend to examine the same. But before we delve into further details let us understand what changes have been made to section 57 of the Aadhaar Act.

The ruling has struck down the last phrase in the main provision of Section 57 of the Aadhaar Act., i.e. “or any contract to this effect”, which enabled fintech companies to use Aadhaar number for verifying the identity of a person for the purpose of KYC. Therefore, the section now reads as:

“Nothing contained in this Act shall prevent the use of Aadhaar number for establishing the identity of an individual for any purpose, whether by the State or any body corporate or person, pursuant to any law, for the time being in force, or any contract to this effect“.

Earlier private entities and bodies corporate were allowed to use Aadhaar number of establishing identities of the customers, however, under the state of law, the private entities will not be able to demand Aadhaar for establishing identity unless the same is pursuant to any law. Therefore, this will change the way KYC checks were being conducted all this while.

Further, the judgement can be interpreted that if any person voluntarily wants to give Aadhaar as a proof of identity/proof of residence, then the same shall be valid. However, Unique Identification Authority of India (“UIDAI”) is seeking legal opinion on the authentication of Aadhaar provided voluntarily by the customers to such private companies and appropriate decisions are expected to be issued in the future.

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Major recommendations of the Committee on Payment Systems on Payment and Settlement System Bill, 2018

By Vishes Kothari & Simran Jalan  (finserv@vinodkothari.com)

Introduction

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[1] 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”). Read more