Digitisation is becoming the main stay of commerce and industry in India. The country has entered the cashless phase of economy. The past decade has witnessed emergence of groundbreaking innovations in the retail payment space facilitating electronic transfer of funds at the tip of a finger.
The Indian banking regulator, Reserve Bank of India (RBI) constantly monitors and regulates the payment and settlement systems in India. RBI recognised the need for digitisation of payments in line with the trends in developed countries. In 2008, National Payments Corporation of India (NPCI) was established by RBI along with the Indian Banks’ Association for creating a robust payment and settlement infrastructure in India. NPCI was set up as a ‘not for profit’ organization with the intention to provide infrastructure to the entire banking system in India for physical as well as electronic payment and settlement systems. The RBI in its report titled ‘Benchmarking India’s Payment Systems’ published in June 2019 noted that the volume of payment transactions grew strongly and steadily at a compound annual growth rate or CAGR of 40% between 2012 and 2017 showing appetite for modes of payment other than cash. In less than a decade, NPCI has established multiple retail payment systems, such as Unified Payment Interface (UPI), Bharat Interface for Money (BHIM), Immediate Payment Service (IMPS), RuPay, etc., which are used at every corner of our country.
RBI has also granted authorisations to various private players for setting up retail payment systems under the Payment and Settlement Act, 2007 (PSS Act). Several fintech companies invested billions of dollars in developing new payment systems and collaborated with various financial institutions in India to get a pie of growing retail payment industry in India. But the private players are largely confined to pre-paid payment instruments (Paytm, Amazon Pay, PhonePe, etc.), cards payment networks (Mastercard, VISA, Amex), ATM Networks and so on. Most of these private players use the payment infrastructure of NPCI for operating their respective payment systems.
NPCI is currently the backbone of retail payment systems in India and is a giant, which the country cannot afford to fail. The RBI, in its policy paper on authorisation of new retail payment systems published in January 2019, discussed about the pros and cons of concentration of payment system operations within the same entity or amongst few operators. A need was felt to encourage more participants and players in the payment operating system to evolve a more robust environment. Towards this objective, on 25 February 2020, the RBI published a draft framework (Draft Framework) which invites private players to set up a pan-India New Umbrella Entity (NUE) for retail payment systems, primarily to make sure there are checks and balances to prevent monopoly and concentration of risk in the hands of a single player.
Overview of the Draft Framework
Ø Promoter: The promoter/promoter group of the NUE should be ‘owned and controlled by residents’ (as defined under the Foreign Exchange Management Act, 1999 ) with a minimum experience of three years in the payment ecosystem as a Payment System Operator (PSO), Payment Service Provider (PSP), or Technology Service Provider (TSP). The shareholding pattern should be diversified. Any entity holding more than 25% of the paid-up capital of the NUE shall be deemed to be a promoter.
Ø Memorandum of Association: It must contain a clause covering the activities of the NUE.
Ø Foreign Investment: In case of foreign investment in the form of Foreign Direct Investment (FDI) or Foreign Portfolio Investment (FPI), it shall fulfill capital requirements prescribed under the Consolidated FDI Policy (which is now captured in the Foreign Exchange Management (Non-debt Instruments) Rules, 2019) and shall be subject to necessary approval of the competent authority under the said rules.
Ø Fit and Proper criteria: The entity / promoter/ promoter group must fulfill the ‘fit and proper’ criteria prescribed by RBI.
Ø Capital Requirements:
§ The NUE must have a minimum paid-up capital of INR 5 billion.
§ A single promoter/ promoter group should not hold more than 40% investment in the capital of the NUE. The promoter/ promoter group should dilute its shareholding to at least 25% after 5 years of the commencement of business by NUE.
§ A minimum net-worth of INR 3 billion must be maintained at all times.
Ø Scope of activities: The NUE should include within its scope activities such as:
§ setting up, managing and operating new payment system(s) especially in the retail space (including ATMs, Aadhaar-based payments and remittance services), developing new payment methods, standards and technologies, monitoring related issues in the country and internationally, and taking care of developmental objectives like enhancement of awareness about the payment systems;
§ operating clearing and settlement systems;
§ fulfilling policy objectives and ensuring that principles of fairness, equity and competitive neutrality are applied in determining participation in the system; and
§ undertaking any other business suitable to further strengthen the retail payments ecosystem in the country.
Ø Governance Structure: The NUE will have to adopt the corporate governance norms issued by RBI for persons to be appointed on the board of NUE. Additionally, the RBI reserves the right to approve appointment of directors and to nominate a member on the board of NUE.
Ø Business Plan: The applicant must submit a detailed business plan covering the payment systems to be set up or operated, experience in payments ecosystem, technology, security features, benefits, operational structure, time period for setting up payment systems, scale of operations, etc.
Ø Procedure: The External Advisory Committee of RBI will scrutinise the application and submit its recommendation to the Board for Regulation and Supervision of Payments and Settlement Systems (BPSS) for its final decision on granting the authorisation for setting up the NUE.
The Draft Framework is definitely a welcome step in opening up avenues for private participation in developing the retail payment infrastructure in India, and introducing new technologies and systems to the consumers at large. It will also lead to more synergies and innovation in the fintech industry and drive more efficiencies and create competition at root of the payment systems. However, prior to finalising the norms for the NUE, the RBI should take into consideration the following aspects:
(i) Although the requirement of initial promoters capital is of INR 500 million, but achieving a minimum net worth of INR 3 billion and a minimum paid-up capital of INR 5 billion could be daunting, and be seen as a hurdle. Raising such a huge amount of capital could pose a challenge for the promoters of NUE; and
(ii) The condition relating to the NUE being ‘owned and controlled by residents’ may also create challenges for the promoters to raise foreign investment. Such restriction may not attract foreign companies, having futuristic technologies, to India.
- Nikhilesh Panchal (Partner), Malav Shah (Principal Associate) and Sharvarie Sohoni (Associate).