Regulations on Prepaid Payment Instruments -Comparing the Master Circular and Master Directions

By Anita Baid, (finserv@vinodkothari.com)

With an enlarged view of the Government to make India go cashless and straddle towards the concept of digitalisation, many companies, specifically NBFCs are seeking approval from the Reserve Bank of India (RBI) to set up business in Prepaid Payment Instruments (PPI). Before getting into the present regulatory framework of such PPIs, one needs to understand the concept of such instruments. PPIs are a form of digital electronic instruments. PPI issuers open an account for its account holders known as PPI holders and with the help of such account, withdrawal/ deposit is made for some pre-ascertained payments or receipt. A certain amount is deposited into such PPI Account from the holder’s Bank A/c and using the balance deposited in the PPI Account, payments are made and/or even cash is received. The introduction of such mechanism enables a person to go cashless. Such PPI instruments can be of three types:

1. Closed- This can be issued by anyone and no approval of RBI is required
2. Semi-closed- Only Companies, banks and NBFCs are allowed to issue such instruments with prior approval of RBI
3. Open- Only Banks are allowed to issue open PPI instruments with prior approval of RBI.

By virtue of the hard core emphasis on the concept of digitalisation and subsequent increase in number of companies willing to issue PPIs, the Reserve Bank of India came up with various directions and circulars to design a proper regulatory framework for such PPI instruments and combat financial terrorism and money laundering.

RBI has come up with [1]Reserve Bank of India (Issuance and Operation of Prepaid Payment Instruments) Directions, 2017 (Master Direction) which came into effect from October 11, 2017. Prior to this the [2]Master Circular on PPI instruments issued by RBI were in force. In this write-up we have tried to summarise the brief changes introduced in the Master Directions as compared to the Master Circular.

Summary of the changes introduced

Applicability

The Master Circular provided a framework for the regulation and supervision of ‘entities’ authorized to issue prepaid payment instruments and ‘entities’ proposing to issue pre-paid payment instruments. However, the Master directions specifically define the applicability on PPI Issuers, System Providers and System Participants. Existing authorised Prepaid Payment Instrument (PPI) issuers shall ensure the compliance with the revised requirements on or before December 31, 2017 and PPIs having existing co-branding agreements at the time of issuance of the Master Direction shall review these agreements as per the directions by December 31, 2017.

 Eligibility to issue Prepaid Payment Instruments

The eligibility criteria to issue PPI instruments remains the same between the Master Directions and the Master Circular, inter alia including Banks and NBFCs who have obtained the approval from RBI to operate as a PPI issuer. But one clause which was prevalent in the Master Circular has been removed from Master Directions being, “3.2 However, only those banks which have been permitted to provide Mobile Banking Transactions by the Reserve Bank of India shall be permitted to launch mobile based prepaid payment instruments (mobile wallets & mobile accounts)”. Pursuant to such omission even those banks that are not providing mobile banking facilities shall now be eligible to issue semi-closed mobile PPIs.

Capital Requirements

There has been a major change in the capital requirements criteria between the Master Circular and Master Directions. The Master Circular provided that any person willing to issue PPI instruments should have a minimum paid up share capital of Rs. 5 crore and positive net worth of Rs. 1 crore at all times.

The Master Directions on the other hand, has increased the overall net worth requirements from Rs. 1 crore to Rs. 5 crores, without any specific limit for paid up share capital. Further, the entity shall be required to achieve a minimum positive net-worth of Rs. 15 crore by the end of the third financial year from the date of receiving final authorisation and maintain the same at all times.

The term ‘Net Worth’ has been defined as it consists of ‘paid up equity capital, preference shares which are compulsorily convertible into equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but not reserves created by revaluation of assets’ adjusted for ‘accumulated loss balance, book value of intangible assets and deferred revenue expenditure, if any’

An additional requirement for intimating the Department of Payment and Settlement System (DPSS) has been introduced. “4.1 All entities (both banks and non-banks), regulated by any of the financial sector regulators and seeking approval / authorisation from the RBI under the PSS Act, shall apply to Department of Payment and Settlement Systems (DPSS), RBI, Central Office, Mumbai along with a ‘No Objection Certificate’ from their respective Regulator, within 45 days of obtaining such clearance.”

 Authorisation Process

The authorisation process to be followed in case of granting approval to PPI issuers was not mentioned in the Master Circular. The Master Directions have put light on such criteria and mentions that ” 5.1 A non-bank entity desirous of setting up payment systems for issuance of PPIs shall apply for authorisation in Form A (available on RBI website) as prescribed under Regulation 3(2) of the Payment and Settlement Systems Regulations, 2008 along with the requisite application fees”.  Also, a provision regarding submission of Systems Audit Report to RBI has been inserted. The regulation says that RBI shall issue an in-principle approval for 6 months within which a Systems Audit Report has to be submitted, failing which the in-principle approval shall lapse automatically.

Validity of CoA

The Certificate of Authorisation shall be valid for five years unless otherwise specified and shall be subject to review including cancellation of Certificate of Authorisation.  The Master Directions inter alia provide that entities seeking renewal of authorisation shall apply in writing to DPSS, RBI, Central Office, Mumbai at least three months before the expiry of validity of Certificate of Authorisation, failing which RBI reserves the right to decline the request for renewal. No such provision was in existence in the Master Circular.

 Transaction Limits

Cash loading to PPIs has been limited to Rs. 50000/- per month subject to overall limit of the PPI. Further, PPI issuers shall ensure that there is no co-mingling of funds among the various activities that it provides. Also, the PPI issuers are required to ensure that the same user is unable to avail the same category of PPI in future.

Earlier PPI upto Rs.10,000/- could be issued by accepting minimum details of the customer and for PPIs from Rs.10,001/- to Rs.50,000/- the PPI issuer would  accept any ‘officially valid document’ defined under Rule 2(d) of the PML Rules 2005, as amended from time to time. However, the Master Directions have introduced an amendment to the conditions relating PPIs upto Rs. 10,000/- being issued by accepting minimum details which include mobile number verified with One Time Pin (OTP) and self-declaration of name and unique identification number of any of the ‘officially valid document’ .

Further, the amount loaded and the total amount deposited in the PPI must not exceed Rs. 10,000/- during any given month and the total amount loaded during any financial year must not exceed Rs. 1,00,000/-. Additionally, the amount outstanding at any point of time in the PPIs must not exceed Rs. 10,000/-.

Prepaid meal instruments

Pursuant to the Master Directions, prepaid meal instruments must be issued only as semi-closed PPIs that are electronic and reloadable in nature. Further, the Directions also insert state that no prepaid meal instrument in paper voucher form shall be issued after 31st December, 2017

Intimation

There is a requirement of communicating the following to the RBI:

1. Any proposed major change, such as changes in product features / process, structure or operation of the payment system, etc. RBI shall endeavor to reply within 15 business days after receipt of such communication
2. Any takeover or acquisition of control or change in management of a non-bank entity shall be communicated within 15 days with complete details, including ‘Declaration and Undertaking’ by each of the new directors, if any. RBI shall examine the ‘fit and proper’ status of the management and, if required, may place suitable restrictions on such changes.

 PPI for cross border transactions

Earlier, as per the Master Circular, persons authorized under Foreign Exchange Management Act (FEMA) to issue foreign exchange pre-paid payment instruments and such persons who issued such instruments as participants of payment systems authorised by the RBI, were exempt from the purview of the PPI guidelines. Additionally as per the Master Directions, the use of INR denominated PPIs for cross border transactions have also been permitted in the following cases:

1. KYC compliant reloadable semi-closed and open system PPIs issued by banks having AD-I licence, used in cross-border outward transactions (only for permissible current account transactions under FEMA viz. purchase of goods and services), subject to adherence to extant norms governing such transactions.
2. PPIs issued to beneficiaries of inward remittance, under the Money Transfer Service Scheme (MTSS) of the RBI, by bank and non-bank PPI issuers, who have been appointed as the Indian agent of the authorised overseas principal.

Record of transactions

The Master Directions require the PPI issuers to maintain a log of all the transactions undertaken using the PPIs for at least ten years. This data shall be made available for scrutiny to RBI or any other agency / agencies as may be advised by RBI. The PPI issuers shall also file Suspicious Transaction Reports (STRs) to Financial Intelligence Unit-India (FIU-IND). Thought the requirement was also there in the Master Circular, however, the time period was not specified.

 Issuance, loading and reloading of PPIs

The formulation and implementation of the following policies duly approved by the Board of Directors of PPI issuers has been introduced in the Master Directions:

1. Policy for issuance of various types / categories of PPIs and all activities related thereto;
2. Policy laying down the framework for engaging agents for the purpose of issuance and reloading of PPIs;
3. Policy for co-branding arrangement of the PPI issuer. The policy shall specifically address issues pertaining to the various risks associated with such an arrangement including reputation risk and the PPI issuer shall put in place suitable risk mitigation measures. The policy shall also clearly lay down the roles, responsibilities and obligations of each co-branding partner;
4. Policy for revalidation of the gift instruments and PPIs for Mass Transit Systems (PPI-MTS);
5. Risk Management Policy;
6. Information Security policy for the safety and security of the payment systems operated by the PPI issuer, and implement security measures in accordance with the policy to mitigate identified risks;
7. Grievance Redressal Policy.

 Prepaid Gift Instruments

The Master Circulars required that the maximum value of such gift instruments should not exceed Rs. 50,000. The Master Directions have now reduced the limit to Rs. 10,000. Further, the validity previously was restricted to a maximum period of 3 years which has now been removed. As per the Directions the minimum validity shall be 1 year with no bar on the maximum validity period.

PPIs for Mass Transit System

The PPI-MTS issued may be reloadable in nature and at no point of time the value / balance in PPI can exceed the limit of Rs. 2,000/- (Rupees Two Thousand Only). This limit mentioned in the Master Circular of Rs. 2000 has been increased to Rs. 3000 in the Master Directions. As per the Directions the minimum validity shall be 1 year with no bar on the maximum validity period.

Minimum Validity Period of Prepaid Instruments

The minimum validity period for all PPIs issued in the country has been increased from 6 months in the Master Circular to 1 year from the date of last loading / reloading in the PPI, in the Master Directions. Also, the issuers are free to issue PPIs for a greater period of time. The PPI issuer is always required to give intimation to the holder regarding expiry of such account at regular intervals of 45 days as per the Master Directions.

Prepaid instruments issued by PPI issuers to Companies and Government Organisations for onward issuance to employees/beneficiaries of Government Sponsored Scheme:

The Master Circular allowed that PPI issuers could issue PPIs to companies and Government Organisations for onward remittance to its employees/staff workers/beneficiaries of Government scheme etc. Amendment made to the Master Circular included other entities as well to whom PPI can be issued, being unlisted corporates / partnership firms / sole proprietorship / public organizations like municipal corporations, urban local bodies, etc. (employers) for onward issuance to their staff / employees / contract workers, etc. This has been disallowed in the Master Directions stating that Companies and Government Organisations cannot issue PPIs to its beneficiaries. It cannot act as an intermediary between the PPI issuer and the beneficiaries. If the Company and/or Government Organisation is willing to provide PPI to its beneficiaries then the PPI issuer has to directly issue it to them and not indirectly through the Company and/or Government Organisations.

Conclusion:

A gist of the changes so made to the guidelines for PPI Issuers, System Providers and System Participants by the Master Directions as compared to the erstwhile Master Circular has been discussed herein above. It has been observed that the Master Directions are more detailed in nature giving proper information regarding the reporting requirements of a PPI issuer. The regulations aims to ensure a cashless economy and the introduction of such stringent changes shall protect the issuers a well as users of PPIs from any scope of money laundering or cyber threat.

[1]https://rbidocs.rbi.org.in/rdocs/notification/PDFs/58PPIS11102017A79E58CAEA28472A94596CFA79A1FA3F.PDF

[2] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/16MC9102DB7D5FE742CCB5D0715A77F6666E.PDF