The Indian e-commerce boom coupled with the recent demonetization drive by the Indian Government has put the online payment systems to the forefront as a means of easy e-payments. While cash continues to be the predominant and most preferred mode of payment, the prepaid payment instruments (“PPIs”) such as e-wallets etc. are growing in popularity. As a consequence, the Reserve Bank of India has re-assessed the extant regulations as applicable to the PPIs to make the non-cash payment modes safe, secure and KYC compliant for better risk mitigation and customer protection.
Accordingly, RBI had earlier this year on March 20, 2017, issued draft master directions on ‘All Prepaid Payment Instrument Issuers, System Providers, System Participants and all prospective Prepaid Payment Instrument Issuers’, (“Draft Master Directions”), for public comments, by incorporating all instructions/guidelines issued so far along with certain significant amendments to the extant regulations.
Sharp Increase in Minimum Net Worth Requirement.
The Draft Master Directions have proposed a sharp increase in the minimum positive net worth threshold to be maintained by PPI issuers. Under the extant regulations, all entities seeking authorization from RBI to operate as a PPI issuer are required to have a minimum capital threshold of Rs. 5 Crores and minimum positive net worth of Rs.1 Crore at all the times. However, the Draft Master Directions propose to do away with the minimum capital requirement and instead all entities seeking approval of RBI to operate a payment system of PPI are required to have and maintain a minimum positive net worth1 of Rs. 25 Crores as per the last audited balance sheet.
Transition Period Allowed to Existing Entities.
The Draft Master Directions allow the existing PPI issuers time to comply with the enhanced capital requirements by September 30, 2020 for the financial position as on March 31, 2020, failing which they will not be permitted to carry on this business beyond December 31, 2020. Till such time, the existing PPI issuers shall continue to maintain the capital requirements under which they were authorized.
RBI has also sought to impose more stringent KYC and customer due diligence requirements on PPI issuers. The Draft Master Directions also propose changes in relation to customer service and protection related aspects such as safety and security of the transactions as also the risk mitigation measures, complaint redressal mechanism, forfeiture of unutilised balances, fraud monitoring and reporting requirements, etc. so as to inter alia prevent suspicious and fraudulent transactions.
Temporary Suspension of Fresh Approvals and Change in Control restrictions.
Prior approval of the RBI is required to be obtained for authorization and operation of specified categories of PPIs under the Payment and Settlement Systems Act, 2007 (“PSS Act”) and the corresponding rules, regulations, guidelines issued by RBI from time to time. RBI, in its press release dated September 2, 2016 had specified that it is undertaking a comprehensive review of the guidelines and framework for PPI issuance, and in this background, it has decided to temporarily suspend receipt of fresh applications from banks and non-banks for grant of authorization to operate a payment system for PPIs under PSS Act till February 28, 2017. Significantly, RBI in its press release had stated that during this period, change in ownership/shareholding of an existing authorized entity would be permitted only where required due to court orders, mergers or amalgamations and/or regulatory exigencies. Applications already received by RBI were to be processed as per the extant guidelines.
As a consequence, till the date of release of final guidelines, not only the grant of fresh authorizations to operate a payment system for PPI will remain suspended but restrictions are also placed on any change in ownership/shareholding of an existing authorized entity issuing PPIs. Further, a similar restriction is also provided under the Draft Master Directions, as per which any takeover or acquisition of control of non-bank entity, which may or may not result in change of management; or any change in the management resulting in change in more than 30% of the directors, excluding independent directors would require prior approval for RBI.
The proposed significant increase in the net worth requirement appears to be a move by RBI to ensure that PPIs are issued by entities with significant resources to ensure safety and security of these instruments and compliance with the increased KYC compliance requirements. However, this move has created a stir in the financial milieu of many PPI entities. Further, the implementation of the other proposed changes may also require issuing entities to overhaul their customer on-boarding, KYC and compliance, and reporting processes. Compliance with these Draft Master Directions, when notified may therefore be more cumbersome and challenging for the PPI issuing entities but more safe and secure for the customers.
1In terms of the Draft Master Directions, net worth would consist 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.”