The Reserve Bank of India (“RBI”) has issued various guidelines from time to time on issuance and operations of Prepaid Payment Instruments (“PPIs”) in India. PPIs are defined as payment instruments that facilitate purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments, and can be classified under three types viz. (i) Closed System PPIs, (ii) Semi-closed System PPIs, and (iii) Open System PPIs.
In view of the numerous technological innovations, progress in fintech and the use of PPIs growing at an exponential rate, RBI with the aim to foster innovation and competition, safety, security, and customer protection, has issued a fresh set of directions relating to issuance and operations of PPIs on October 11, 2017, in the form of RBI (Issuance and Operation of Prepaid Payment Instruments) Directions, 2017 (“Master Directions”). These Master Directions are applicable to PPI Issuers, System Providers, and System Participants, and are effective immediately. Existing authorised PPI issuers have, however, been allowed till December 31, 2017 to comply with the revised requirements (except where otherwise specified in the Directions).
These Master Directions can be traced back to March 20, 2017, when the RBI had issued draft master directions for public comments (as discussed by us in an earlier article1), and the RBI has now issued the final Master Directions, introducing various key changes in the regulatory regime governing PPIs.
- Change in Eligibility Requirements: Closed system PPIs (which are issued by an entity for facilitating the purchase of goods and services from that entity only and do not permit cash withdrawal), are not classified as payment systems requiring approval/authorisation by the RBI. On the other hand, the issuers of semi-closed and open system PPIs need to obtain prior approval from RBI and need to satisfy certain eligibility requirements in this regard.
For instance, earlier entities (other than Banks and Non-Banking Financial Companies) seeking approval from RBI to operate PPIs were 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, in a significant move, the Master Directions have removed the minimum capital threshold requirement and instead mandated a two-step minimum positive net-worth requirement2 of Rs. 5 crore at the time of seeking RBI authorization, which needs to be increased to Rs. 15 crore by the end of the third financial year from the date of receiving final authorisation from RBI (which interestingly is lower than the earlier proposed minimum positive net worth requirement of Rs. 25 Crores under the draft directions of March, 2017).
All existing non-bank PPI issuers are required to comply with the net-worth requirement of Rs. 15 crore for the financial position as on March 31, 2020 failing which the entity may not be permitted to carry out this business. Till such time, the existing PPI issuers shall continue to maintain the capital requirements applicable to them at the time of their authorisation.
- Allowing Interoperability between PPIs: One of the key purposes of introducing the Master Directions has been to provide for harmonisation and interoperability of PPIs in a phased manner. This interoperability where PPIs can transact with each other, will enable the customers to use a set of payment instruments seamlessly. In the first phase, PPI Issuers are to make all KYC-compliant wallets interoperable through Unified Payments Interface (UPI) within 6 months from issuance of these Master Directions. In subsequent phases, interoperability is to be enabled between wallets and bank accounts through UPI. Similarly, interoperability for PPIs issued in the form of cards is also be enabled in due course.
PPI Issuers are to ensure adherence to the technical and operational requirements for such interoperability, including those relating to safety and security, risk mitigation, etc. The operational guidelines will, however, be issued separately.
- Stringent KYC norms: The KYC norms under the Master Directions have been made more stringent. For instance, a stricter KYC compliance has been introduced on a layered basis, where PPIs with a limit of up to Rs. 10,000 can be issued on a minimum KYC basis but are to be converted into fully KYC compliant PPIs within a period of 12 months from date of issue of PPI. For other PPI’s up to Rs. 1,00,000, full KYC compliance is required from the start.
- Authorisation Process: The new Master Directions contemplate issuance of an “in principle” approval by RBI, with a validity of 6 months, subject to the entities meeting the eligibility criteria and other prescribed conditions. The entity is required to submit a satisfactory System Audit Report (SAR) to RBI within these 6 months for grant of final authorization, failing which the in-principle approval shall lapse automatically. An entity can however, seek one-time extension for a maximum period of 6 months for submission of SAR.
- Change in Control: The new Master Directions have mandated that any takeover or acquisition of control or change in management of a non-bank entity, is to be communicated to the RBI within 15 days. Thereafter, the RBI will examine the ‘fit and proper’ status of the management and, if required, can place suitable restrictions on such changes. While, this is a relief for PPI issuers, from the draft master directions which had earlier proposed the requirement for a prior approval in case of any such takeover or acquisition of control, this requirement for intimation coupled with the RBI’s power to impose changes, is still a relevant consideration for the stakeholders involved in such transactions.
- Certain Other Changes: Amongst other changes introduced, the Master Directions have also provided for detailed guidelines on co- branding arrangements by PPIs; use of PPIs for cross border transactions; more detailed reporting requirements etc.
The developments and changes brought in by the Master Directions are demonstrative of RBI’s twin approach towards PPIs – making PPIs an easy and seamless payment solution for customers as evidenced by the proposed interoperability of PPIs and at the same time making them safe and secure by bringing in stricter compliances for PPI issuers.
1“RBI Proposes Higher Net Worth, KYC and Other Changes for Issuers of Prepaid Payment Instruments”, by Seema Jhingan, Neha Yadav and Sudipto Mitra,
2 “Net-worth” has been defined to 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.”