The Reserve Bank of India (the "RBI") issued a Press Release on August 18, 2020, placing on its website a 'framework for authorization of pan-India umbrella entity for retail payments' (the "Framework")1 . The objective of the Framework is to set-up a pan-India umbrella entity/entities ("Umbrella Entity") focusing on the retail payment systems. The RBI has also invited applications for the Umbrella Entity till the closing of business on February 26, 2021.
The Umbrella Entity would primarily be responsible for setting up, managing and operating new payment system(s) in the retail space, including ATMs, White Label PoS, Aadhaar based payments and remittance services.
At present, the National Payments Corporation of India (the "NPCI"), a not-for-profit company set up in December 2008, operates as an umbrella organization for retail payment systems in India. The RBI acknowledged that, over a decade, the NPCI has grown in scale and scope of its operations. By virtue of the numerous payment systems that it operates, the NPCI has emerged as a systematically important payment system entity in India. 2 In the year 2018-2019, the RBI announced that it would encourage more players to participate in and promote pan-India payment platforms with a view to minimize the concentration risk in retail payment systems and promote competition and innovation, from a financial stability perspective.3
In light of the above, the RBI released the Framework after deliberating on the comments received on the 'draft framework for authorization of pan-India umbrella entity for retail payment'4 (the "Draft Framework") floated by the RBI on February 10, 2020. IndusLaw had also submitted its recommendations to the RBI in response to the press release inviting comments on the Draft Framework.5
3. KEY ASPECTS OF THE FRAMEWORK
3.1 Capital Requirement and Shareholding
The Umbrella Entity is required to be in the form of a company registered under the Companies Act, 2013, and maybe 'for-profit' or 'not-for-profit.' The minimum paid-up capital threshold for the Umbrella Entity has been set at INR 500 crores, which is subject to a minimum contribution of at least 10% (ten percent), i.e., INR 50 crores at the time of making an application. The balance capital needs to be brought in, prior to commencement of operations. Further, a minimum net worth of INR 300 crores is also required to be maintained at all times.
All entities holding up to 25% (twenty-five percent) of the paid-up capital of the Umbrella Entity will be construed to be promoters. No single promoter of Umbrella Entity is permitted to invest more than 40% (forty percent) in the paid-up capital of the Umbrella Entity. The promoter/promoter group may dilute its shareholding to a minimum of 25% (twenty-five percent) after 5 (five) years of the commencement of the business of the Umbrella Entity.
If the applicant of the Umbrella Entity has any foreign direct investment/foreign portfolio investment, then it is required to fulfill all the capital requirements, as mentioned in the Foreign Exchange Management Act, 1999.
3.2 Eligible Promoters
All promoters/promoter groups of the Umbrella Entity should be 'owned and controlled by resident Indian citizens.'
Further, all such promoters/promoter groups should have experience of at least 3 (three) years in the payment ecosystem as Payment System Operator (PSO) / Payment Service Provider (PSP) / Technology Service Provider (TSP). Additionally, the promoters/promoter groups and directors of the promoter company/group company are required to conform to the 'fit and proper' criteria of the RBI. Further, the Umbrella Entity is required to conform to the norms of corporate governance along with 'fit and proper' criteria for directors to be appointed on its board. The RBI will have the right to approve and appoint directors on the board of the Umbrella Entity.
3.3 Scope of Activities
The scope of activities of the Umbrella Entity inter alia include the following: (a) Set-up, manage and operate new payment system(s) in the retail space and take care of developmental objectives like enhancement of awareness about the payment systems; (b) Operate clearing and settlement systems for participating banks and non-bank, identify relevant risks and preserve the integrity of the systems and monitor retail payment system developments and related issues in India and internationally to avoid shocks, frauds, and contagions that may adversely affect the systems and/or economy in general; (c) Ensure that principles of fairness, equity and competitive neutrality are applied in determining participation in the system and frame necessary rules and the related processes to ensure that the system is safe and sound; and (d) Carry on any other business as suitable to further strengthen the retail payments ecosystems in the country.
In addition to the above, the Framework mentions additional scope of activities, which were not previously covered in the Draft Framework, which inter alia include the following: (a) Umbrella Entities are expected to offer innovative payment systems to include hitherto excluded cross-sections of the society and which enhance access, customer convenience and safety and the same to be distinct yet interoperable; (b) The Umbrella Entities are expected to interact and be interoperable, to the extent possible, with the systems operated by the NPCI; and (c) the Umbrella Entities may be permitted to participate in the RBI's payment and settlement systems, including having a current account with the RBI, if required.
3.4 Business Plan
The application for Umbrella Entity is required to contain a detailed business plan. Such business plan should inter alia include the following: (a) payment system proposed to be set-up and/or operated; (b) technology, security features, market analysis/research, benefit, if any, of such payment systems; (c) operational structure of the payment systems; (d) time-period for setting up the payment systems; (e) proposed scale of operations; (f) proposed organizational strategy in terms of fulfilling its responsibility as an Umbrella Entity; and (g) documents to duly establish its experience in the payments ecosystem. In addition to this, the Framework mentions an additional requirement, which was not previously covered in the Draft Framework, that the Umbrella Entity shall have to commence its business/operations within a period of 6 (six) months, extendable to a maximum of 1 (one) year from the date of in-principal approval.
4. INDUSLAW VIEW
The Framework is a welcome move by the RBI towards setting up an alternative to the NPCI in response to the emerging issues of concentration risk in retail payment systems. By encouraging more players to participate in pan-India payment platforms, the Framework is expected to stimulate innovation and competition in the sector, which in turn is likely to have a positive impact on achieving economic efficiency and financial stability. This move would help in enhancing the reach of digital retail payments to a larger number of payments and thereby reducing dependency on cash.
However, while the Framework has been crafted after deliberating on the public comments received on the Draft Framework, some concerns of the industry have not yet been addressed by the RBI, which inter alia include the following:
- the scope of activities mentioned in the Framework are broad and generic and the functions that Umbrella Entities are expected to perform are not clearly articulated in the Framework. Further, considering that Umbrella Entities are permitted to engage in any other business activities to strengthen the retail payment ecosystem, it is not clear how the principles of fairness, equity and competitive neutrality will be applied in order to avoid possible conflict of interest vis. a vis. payment system operated by the Umbrella Entity/group entities of the Umbrella Entity. In this context, it is worthwhile to note that the State Bank of India, is planning to leverage its scale, massive customer base and existing capabilities to offer new digital payment services and is simultaneously examining the possibility of applying for a license under the Framework as well6 ;
- the qualifying criteria for directors, promoters and promoter groups being inherently subjective and open to interpretative ambiguity;
- the requirement under the Framework for the promoter to be owned and controlled by resident Indian citizens being in conflict with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 which allows for 100% (one hundred percent) foreign direct investment under the automatic route for 'Other Financial Services' regulated by financial sector regulators; and
- Interestingly the minimum threshold of INR 500 crores references nominal paid-up capital and should be clarified to include share premium as well, as otherwise this may result in excluding upcoming and promising players in the market that are conducive to innovation and development in the retail payments system space.
2. Financial Stability Report, Issue no. 20, issued by the RBI in December, 2019
3. Statement on Developmental and Regulatory Policies [https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=44125], Second bi-monthly Monetary Policy Statement 2018-19 [https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=44125], Financial Stability Report, Issue no. 20 [https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/0FSRDECEMBER20198C840246658946159CB3B94E8516F2EC.PDF]
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