RBI has power to regulate Payment Aggregators: Delhi High Court

RBI has power to regulate Payment Aggregators: Delhi High Court

The suggestions by the regulatory body were robust and protected the interests of all stakeholders

The Delhi High Court has held that since payment aggregators (PAs) fall within the ambit of the definition of 'payment systems,' the Reserve Bank of India (RBI) can frame guidelines to regulate them.

A division bench of Justice Rajiv Shakdher and Justice Tara Vitasta Ganju, while ruling on the Lotus Pay Solutions Pvt Ltd & Anr vs Union of India & Ors case, said that the PAs must seek authorization from the central bank to operate.

The court dismissed the petition by Lotus Pay, one of the PAs functioning in the country. It had approached the court challenging three clauses of the 17 March 2020 RBI circular titled Guidelines on Regulation of Payment Aggregators and Payment Gateways.

The circular mandated that non-banking entities offering payment aggregation services would have to obtain authorization from the RBI to continue their operations. It said that the existing PAs would have to achieve a net worth of Rs.15 crore by the end of March 2021 and scale up the same to Rs.25 crore by the end of March 2023.

The circular stated that non-banking PAs must ensure that the amount collected by them was placed in an escrow account, instead of a nodal account maintained with a scheduled commercial bank. The clause said that for maintenance of the escrow account, the operations of the PAs must be deemed to be 'designated payment systems' under the Payment and Settlement Systems Act, 2007.

In effect, a PA collects funds from the customers on behalf of its clients - merchants or e-commerce companies. The funds are placed in a special 'nodal bank account' and remitted from the bank to its clients as per the pre-agreed terms and conditions. A three-day settlement period is provided for the transmission of funds from the nodal bank account to the client's accounts.

The 'payment systems' is a procedure enabling the payment to be effected between the person who pays, and the beneficiary. It involves clearing, payment, or settlement service without a stock exchange's inclusion. This includes systems that enable credit cards, debit cards, smart cards, money transfers, or any similar operations.

In its judgment, the high court observed that the PAs not only provide an integrated system but also handle the funds of customers. Therefore, their services, via the use of technology, fall within the ambit of the payment system.

The court rejected the petitioners' argument that the requirement to have a minimum net worth of Rs.15 crores would drive out small entrepreneurs and start-ups. It noted that from a proposed net worth of Rs.100 crores, the RBI brought it down to Rs.15 crores. This step modulation was based on the responses received by RBI in its discussion paper.

The bench found merit in RBI's stand that since PAs would handle funds provided by the customers, it would require only those applicants who had some amount of financial wherewithal to enter the industry. On the issue of switching from nodal bank accounts to escrow accounts, the court said the alternative suggested by the RBI was a more robust mechanism, protecting all stakeholders' interests.

The judges stressed that under the 2007 Act, RBI had the power to require a system provider to deposit the amount and then keep it in a separate account(s) in a scheduled bank.

The bench added that as per the RBI circular, PAs could maintain one additional escrow account. Therefore, the argument advanced on behalf of the petitioners concerning the spreading of financial risk was taken care of.