RBI’s dissent on the PSS Bill, 2018

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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.

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The Supreme Court Aadhaar Verdict- Major blow to Fintech Companies

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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

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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 →

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

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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: Read more →

Getting a licence for Pre-paid Payment Instruments in India.

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 By Ameet Roy,( finserv@vinodkothari.com)

Payment systems in India are governed by the Payment and Settlement Systems Act, 2007 (PSS Act) and the RBI is the regulatory of all payment system India. All applications for granting of licence under the PSS Act has to be made to the RBI.

Under the guidelines for Issuance and Operation of Pre-paid Payment Instruments (PPIs) in India, an entity desirous of entering into business of issuance and operation of pre-paid payment instruments shall at all time maintain a minimum paid up capital of Rs. 5 Crore and positive net worth of Rs. 1 Crore.

An entity which fulfils the above mentioned capital requirements should file an application for grant of licence under the PSS Act on Form A (Application form for authorisation to set up payments systems) to the RBI with a nominal application fee of Rs. 10,000/-. On the form the entity should give all its details along with –

  1. Citing concrete benefits to the financial system/ country from the operationalisation of the payment to be set up.
  2. Experience of the applicants in the relevant field (the RBI seems very determined to allow operation of PPIs to serious and experienced persons in the field of payment systems).
  3. Method of settlement of payment claims (gross / net / hybrid).
  4. Details of bankers of the applicant entity.
  5. Banker’s report on the functioning of the applicant account and its financial health.
  6. Details of settlement agents for the proposed payment system.
  7. Whether the settlement agent will act as central counterparty to provide guarantee.
  8. Amount of finance required to execute the payment system project
  9. Sources of finance –
    1. Amount of own capital proposed to be deployed
    2. Amount of borrowings expected from banks
    3. Amount of borrowing expected from sources other than banks (sources to be properly disclosed)
  10. Rate of return on investment expected from the payment system sought to be set up
  11. How does the applicant propose to recover its investment and earn an income, that is, whether through cash flows or by levying joining fees, security fees, annual/ operating charges etc.( full details to be given)

and various other information which will help the RBI assess the potential of the proposed business and its future prospects. The will only grant licence after being totally confident of the viability and security of the payment systems.

For help and assistance on the application of licence for setting up payment systems mail us at – finserv@vinodkothari.com

Overview of Regulatory Framework of Payment and Settlement Systems in India by Anita Baid

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Introduction

It has been a while that there has been a buzz around the emerging concept of financial technology (fintech), which seems to be evolving at an unimaginable speed. The technological development taking place globally, have compelled the traditionally cash-driven Indian economy to respond promptly to the fintech opportunities. The modern payment systems have overcome the shortcoming of the traditional mode of cash based payments where handing of cash was the most cumbersome part of all transaction. It is a known fact that the overall economic efficiency and stability of any country is dependent on the payment and settlement system in that country. As a result, the regulators in our country, including the central bank, have also been revisiting their operating model and policies regularly, to ensure and carry out the development of national payment systems. The regulators have to closely safeguard the sanctity of payment systems, primarily from the viewpoint of systemic risk, risk of fraud, etc. Specifically, it is the responsibility of the central bank of any country, that is to say the Reserve Bank of India (RBI) for our country, to ensure and carry out the development of national payment systems.

This article is intended to provide a panoramic view of the schematics of regulation over Indian payment and settlement systems.

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Stringent norms ahead for the issuers of Pre-paid Payment Instruments (PPIs) in India, Kirti Sharma

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Introduction

India Inc is witnessing a major shift from cash driven economy to a cashless economy with a steep rise in the mobile transaction services through digital payment modes in the financial technology industry undoubtedly pushing huge pressure on cash. The payment industry is striving to become an integral part of the economy. With the evolution of online wallets, consumers are provided with simpler and more efficient method to complete online transactions Read more →

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

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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 21st 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 Read more →