RBI’s Interoperability guidelines for PPIs- A move to promote Digitalization
By Simran Jalan (simran@vinodkothari.com)
Introduction
Interoperability is the ability of customers to use a set of payment instruments seamlessly with other users within the segment. It enables a payment system to be used in conjunction with other payment systems. It allows Prepaid Payment Instruments (PPI) issuers and other service providers to undertake, clear and settle payment transactions across systems, without participating in multiple systems. All the service providers adopt common standards so as to make the PPIs interoperable. This interoperability shall facilitate payments among different wallets inter se and with banks. Paytm, Freecharge, Oxygen wallet, Airtel money, etc. are some of the digital wallets operating in India currently.
Last year, RBI issued Master Directions on Issuance and Operation of Prepaid Payment Instruments[1] (“Master Directions”) to regulate the prepaid payment instruments and to monitor the working of the PPI issuers. This was the much required legislative framework to supervise the prepaid payment industry. The Master Directions also provided for interoperability of the PPIs. It stated that the interoperability shall be enabled in the following phases for the PPIs:
The Master Directions mandated the first phase for all KYC compliant PPIs (bank and non-bank) issued in the form of wallets to have interoperability amongst themselves through UPI within 6 months from the issue of the Master Directions. This ensured fair competition between the different PPI providers as some providers used to spend exorbitantly to get merchants on-board and this would in turn eliminate competition.
RBI’s dissent on the PSS Bill, 2018
By Simran Jalan (simran@vinodkothari.com)
Introduction
An Inter-Ministerial Committee was formed to finalise Payment and Settlement System Bill, 2018 to amend the Payment and Settlement System Act, 2007 (“PSS Act”). The Bill seeks to foster competition, consumer protection, systemic stability and resilience in payment sector and establish an independent Payments Regulator Board (“PRB”) to regulate the same. The proposals of the Government to amend the PSS Act at length is covered in our previous Article- Major recommendations of the Committee on Payment Systems.
Reserve Bank of India (“RBI”) had raised various objections in the Bill and has, further, issued dissent note[1] to bring out into public domain the fact that RBI is not happy with the government’s attempt to take control of payment and settlement systems.
Dissent of RBI
The RBI has given the dissent on the following recommendations of the committee:
• On composition of PRB
RBI has contended that there has been a major departure with respect to composition of the PRB from what was proposed under the Finance Bill, 2017. Initially, the Finance Bill proposed that the PRB shall be constituted with the Governor of RBI as the Chairman, however, the PSS Bill states that the Chairman of the PRB shall be appointed by the Government in consultation with the RBI.
Further, the Finance Bill, 2017 suggested that the PRB must be built into the overall framework and the RBI, however, the PSS Bill states that the PRB shall be an independent body. Payment and settlement system being a sub-set of the currency management system, keeping the PRB independent of RBI would not be appropriate. The Monetary Policy has a huge impact on the payment systems and therefore, the power to regulate the payment systems should be with the monetary authority.
The Bill also provides for a formal mechanism for co-ordination between PRB and RBI. The RBI is of a view that the operations of PRB should be integrated and not co-ordinated with RBI.
Further, banks are the most important parties of the payment systems, RBI being the banking regulator makes it logical to keep integrate PRB within the operations of the RBI.
It will additionally provide holistic benefits since a single regulator will decrease the compliance costs as compared to the costs incurred if there are multiple regulators and will be more effective.
Further, the Bill stated that it was necessary 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. In respect to this statement, RBI commented that the payment systems are nothing but digital substitutes of currency. RBI creates currency and distributes them through banks. Major concern of RBI was that the non-banks were ascribed the job of creating money via payment systems.
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.
Variable Capital Company: Singapore proposes a new way of making investments
Can India replicate this model?
By Simran Jalan (finserv@vinodkothari.com)
Introduction
On March 23, 2017, Monetary Authority of Singapore (MAS) issued a consultation paper[1] for Singapore Variable Capital Companies. On September 10, 2018, the MAS tabled the Variable Capital Companies Bill (the “Bill”)[2] in Singapore Parliament.
The Variable Capital Company (“VCC”) is a corporate structure that is tailored for collective investment schemes (“CIS”). In Singapore, the most commonly used investment fund structures are unit trusts (constituted by way of trust deeds) and investment companies. The legislative framework for VCC seeks to provide an alternative to incorporating a company under the Singapore Companies Act (“CA”) for the formation of CIS in Singapore.
With the introduction of the VCC structure, the fund managers will have greater operational flexibility. This VCC structure will act as a platform for the fund managers to establish a domicile of their investment funds in Singapore.
This Bill will be administered by the Accounting and Corporate Regulatory Authority (“ACRA”) and will act as the registrar. However, the anti-money laundering and counter-financing of terrorism obligations of VCC will be overseen by the MAS. Read more →
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 →