Prerna Gala
Published on: September 19, 2022 at 20:48 IST
According to the Delhi High Court’s ruling in LotusPay Solutions Pvt Ltd vs. Union of India & Ors., Payment Aggregators (PAs) are covered under the definition of Payment Systems and the Reserve Bank of India (RBI) can create regulations to control them.
According to a division bench of Justices Rajiv Shakdher and Tara Vitasta Ganju, the PAs need the central bank’s permission to operate.
A PA efficiently collects money from clients, who may be shops or online retailers, on behalf of their clients. These funds are then transferred to a special bank account known as a “nodal bank account,” which is kept at a designated nodal bank. The bank then transfers these funds to its clients in accordance with previously agreed terms.
In actuality, the transmission of money from the nodal bank account to the client’s accounts is allowed within a three-day settlement period.
A system that enables payment to be made between a payer and a beneficiary is referred to as a payment system. It involves one or more of the following services: clearing, payment, or settlement, but it excludes stock exchanges.
This covers any systems that permit the use of credit cards, debit cards, smart cards, money transfers, or any other comparable operations.
According to the Court’s ruling, PAs handle client cash in addition to offering an integrated system, thus, any services they give to payers and beneficiaries through the use of technology would be considered part of the payment system.
The court recently dismissed a plea filed by LotusPay Solutions Private Limited, the founder of one of the PAs operating in the nation.
Three provisions of the RBI circular titled “Guidelines on Regulation of Payment Aggregators and Payment Gateways” dated March 17, 2020 were challenged in court by LotusPay.
The circular stipulated that in order to continue their business activities, non-banking firms that provide payment aggregation services must seek RBI authorization.
It stated that current PAs must reach a net worth of Rs. 15 crores by the end of March 2021 before increasing it to Rs. 25 crores by the end of March 2023.
The circular further stated that non-bank Pas must make sure that any money they collect is deposited into an escrow account, rather than a nodal account, with a designated commercial bank.
This section further states that the PAs’ operations shall be considered “designated payment systems” for the purposes of maintaining the escrow account under Section 23A of the Payment and Settlement Systems Act, 2007.
The Court rejected the claim that small business owners and start-ups would also be driven out by the requirement to have a minimum net worth of Rs. 15 crores.
The RBI has reduced the planned net worth from Rs. 100 crores to Rs. 15 crores, it was reported, and this step adjustment was made possible by the replies the RBI received to the discussion paper posted on its website.
The bench also agreed with RBI’s argument that only people with certain financial means should apply for jobs in the PA sector because they will manage consumer monies.
“…It is relevant to note that RBI has taken an emphatic stand in its counter-affidavit, that it had received 57 responses to its Discussion paper, and that out of the 57 respondents, only 19 objected to a minimum net worth requirement of ₹100 crores proposed in the Discussion paper.”
“On behalf of the RBI, it has been conveyed to us, that despite a vast majority of respondents not objecting to a minimum net worth requirement of ₹100 crores, it was deemed fit to reduce the minimum threshold to ₹15 crores,” the Court said.
Regarding the question of converting nodal bank accounts to escrow accounts, the Court stated that the RBI’s substitute is a more reliable method that safeguards the interests of all stakeholders.
According to the judges, RBI is able to force a system provider of payment systems to deposit money and subsequently maintain it in a separate account or accounts in a scheduled bank under Section 23A of the Payment and Settlement Systems Act 2007.
“The RBI, thus, in consonance with the provisions of Section 23A of the 2007 Act has provided, via Clause 8 of the 2020 Guidelines, that PAs would deposit payments received from customers in an escrow account maintained with a scheduled commercial bank.”
“There can be no doubt about RBI being invested with such power. There is also no doubt, that PAs would be operating a designated payment system, as defined in explanation (a) to Section 23A of the 2007 Act.”
The bench continued, noting that the RBI had issued a circular dated November 17, 2020 allowing PAs to maintain an additional escrow account, somewhat resolving the petitioners’ claim regarding the sharing of financial risk.
Finally, it came to the conclusion that the petitioner’s concerns are secondary to the public interest considerations incorporated into the guidelines’ formulation.
