Reforms to hit the Prepaid Payment Instrument issuers hard, by Ameet Roy

The financial year 2017-18 is all set to bring in an array of reforms thought the Indian economy, all aimed to achieve one thing and one thing only – turn India into a 21^st century super economy . Where business would be able to run without any hurdles involving regulatory, technological, man power, etc.

As India enters into the transformation stage into a super economy, new challenges have started to surface for the regulators, keeping the economy on track to achieve the national goal is of primary concern in this crucial stage. One of the many such challenges is the concern regarding the new age payments solutions which as emerged as the brain child of some revolutionary young minds. Who aims to cater to the needs of the situation and in turn come out as successful entrepreneurs. The idea of alternative payment has been accepted widely throughout the country. More and more people are now moving on to these alternative payment solutions. As traffic increases on the servers of these new generation entrepreneurs the risk is also increasing. The government needs to take adequate steps to ensure these new entities are being able to manage these transaction with zero down time and real time settlement so as to ensure integrity of the Indian economy as a whole.

To keep check on the activity of the alternative payment solution providers the RBI as recently rolled out the Master Directions on Issuance and Operation of Prepaid Payment Instruments in India. These direction is the consolidation of the all the previous regulation issued by the RBI for the prepaid payment instrument issuers and also proposes some changes in the regulation which is currently in its draft stage and is open for comment form the stakeholders. In this article we have tried to highlight the points proposed changes and analyse its effect on the industry.

Post publication of the above mentioned direction the requirement of minimum paid up capital of 5 Cr. and positive networth of 1 Cr. has been removed. Moving forward new entities desirous of entering into business of issuance of prepaid payment instrument needs to have a minimum positive networth of Rs. 25 Cr. [Networth = Paid-up Capital + Compulsory Convertible Preference Shares + Free Reserves + Share Premium Account + Capital Reserve excluding revaluation reserve – (accumulated loss + book value of intangible assets + deferred revenue expenditure)]. With this increased capital requirement the RBI has ensured, entry of only deep pocketed entities in the business of issuance of PPIs. This was required to ensure the players are capable of deploying proper and secure technology to ensure integrity of the PPI system and minimise the chances of data theft or unauthorised access to public held by the PPI issuers. All entities are required to comply with the capital requirements at all times, apart form this the entities are required to submit certificate of compliance with the RBI annually by September end every year.

Entities already into business of PPI are allowed time upto 31^st December 2020 to comply with the new capital requirements, failing to achieve the capital requirement by the time allowed will result in cancellation of the PPI licence by the RBI. We can see that the RBI is considerate of the existing entities by providing them with time of 4 years to increase their capital.

The RBI has now permitted deposit of cash by users to reload their PPI balance. From this it is evident that the RBI is desirous of promoting the PPI usage by the public. While on the other hand the RBI is playing safe by allowing entry into the industry to only deep pocketed entities.

Most categories of PPI in India are semi-closed, prior to publication of the instant directions there could be three types of PPI –

1. Value upto Rs- 20,000/- with minimum customer details
2. Rs 20,001/- upto 50,000/- with officially valid documents
3. 50,001/- upto 1,00,000/- with full KYC documents.

From now the 2^nd category of the semi closed PPI has been abolished, therefore only fully KYC compliant accounts can have balance more than Rs. 20,000/-. Appart from this the PPIs of value less than 20,000/- shall also be converted into full KYC PPI within 60 days of there issuance. Hence the regulators are now cautious of the usage of the PPIs and aims to keep a close watch on the same.

Other Changes:

1. Maximum value of prepaid gift cards has been brought down to Rs. 20,000/- from Rs. 50,000/- whereas all other direction regarding the gift cards has been kept same.
2. Prepaid meal vouchers are to be issued only in electronic form, hence the sodexo voucher now need have a digital facelift
3. PPI for mass transit system maximum value has been increased from Rs 2000/- to Rs.3000/-
4. PPI issued to NRI visiting India has been discontinued altogether with immediate effect form the date of publication of these Master Directions.
5. PPI issuers facilitating payment on e-commerce website shall now obtain an undertaking form the individual merchants registered on the e-commerce website (who are actually accepting payments through the PPIs of the Issuers).
6. The banks maintaining the escrow account of the PPI issuers shall obtain the list of individual merchants accepting payment through the PPI and the same must be submitted to RBI by the bank.

There has been a lot of changes provided for in the instant direction some of which is hit to PPI issuers, whereas some are more enabling for the business to runs more smoothly. While a lot is being done by the regulators to minimise risk and facilitate smooth functioning of the business, for the exact outcome of the directions we need to wait for the reaction of the entities already into business.

by – Ameet Roy (ameet@vinodkothari.com)