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FinTech & Law : Payment Systems – By CA Nirmal Ghorawat

Author : CA Nirmal Ghorawat  (The author is a member of the Institute of Chartered Accountants of India (ICAI).
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Fintech – portmanteau of the words “Finance” and “Technology” is the buzzword in Finance and Technology worlds with a large number of newage startups disrupting legacy businesses of established financial institutions. Whilst great emphasis is paid on the Finance and Technology aspects of their startups, budding entrepreneurs fail to gauge the law / legal compliance requirements. Financial Services, the segment to which a large number of Fintech ventures cater is a rigidly regulated sector in India. Law has definitely not kept pace with the advances in Technology or the ambitions of new-age entrepreneurs.
In this series we try to gain a basic understanding of the general regulations affecting the operation and business models of Fintech startups. We will start with payment systems – what we refer to as Money Transfer Services in Fintech.
Foreign inward personal remittances towards family maintenance and remittances favouring foreign tourists visiting India are permissible under the Money Transfer Service Scheme of RBI will be dealt with in a separate article. Similarly prepaid payment instruments that facilitate purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments will also be discussed in a separate article.
The Payment and Settlement Systems Act, 2007 is the principal law dealing with the licensing (authorisation to operate) and supervision of payment and settlement systems in India.
The Act defines a “payment system” to mean a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange. Examples of a “payment system” includes the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations, prepaid payment instruments or other similar operations.
The Reserve Bank of India exercising it’s powers through a Committee of its Governing Board called as the “Board for Regulation and Supervision of Payment and Settlement Systems” is the designated authority for the regulation and supervision of payment and settlement systems in India.
The Act mandates “payment system operators” to obtain an authorisation (license) issued by the RBI to commence or operate a payment system. On receipt of an application along with requisite fees, the RBI will make such inquiries as it may consider necessary for the purpose of satisfying itself about the genuineness of the particulars furnished by the applicant, his capacity to operate the payment system, the credentials of the participants, etc. The RBI has powers to grant, decline, regulate and supervise and revoke an authorisation under the Act.

Failure to obtain an authorisation to operate a payment system from the RBI is an offence under the Act punishable with imprisonment for a term which shall not be less than one month but which may extend to ten years or with fine which may extend to one crore rupees or with both and with a further fine which may extend to one lakh rupees for every day, after the first during which the contravention or failure to comply continues.

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