The advent of technology made a great impact on various sectors of India. This impact is most evident in the banking sector since it enables hassle-free transactions on a day-to-day basis. This has also led to the emergence of an industry known as "Payment Services". In order to regulate the mode of operation by the industry and banks, an act known as the Payment and Settlement Systems Act 2007 ("Act") was formulated in the year 2007. However, it is pertinent to note that the Act has gained importance post de-monetisation in the year 2016 as an increase in online digital payments by the consumers is observed. This, in turn, has necessitated the Reserve bank of India ("RBI") to strictly monitor payment service operators and banks in India. The Reserve Bank of India has currently made changes to Section 30 and 31 of the Act vide a circular1 dated January 10, 2020.
ASCERTAINED CHANGES IN THE EXISTING FRAMEWORK
The RBI, in order to monitor non-bank players who have entered the payment services industry, has made the following changes to the existing framework.
i) Power of RBI to impose fine and compound:
Initially, Section 30 and 31 of the Act empowered the RBI to impose fines and compound offences but there were lacunae with respect to Section 26, 30 and 31 which are now filled by the latest amendments as it explicitly specifies the offences which can be compounded and the offences with respect to which fines can only be imposed.
ii) Procedure for imposing penalties and compounding of offences:
Previously, the Act provided a common procedure for imposing penalties and compounding of offences, which has been now segregated under this notification and the procedure is different for the imposition of penalties and compounding of offences. This solves a major problem as the two deserve separate treatment.
iii) Delegation of powers to impose fine:
Prior to the amendment, only RBI was authorised to impose penalties but the amendment has brought a significant change and has delegated powers to the designated authorities for the imposition of penalties. The following are the authorities responsible for imposing fines:
Nature of contraventions
A committee of senior officers comprising of:
A committee comprising of:
Partly quantifiable and partly non-quantifiable
The Committee of Chief General Manager (CGM)
iv) Issuance of show cause notice:
Show-cause notice was issued only when the RBI was not satisfied with the explanation provided by the contravener. However, now, there are specific criteria for issuing Show Cause Notice ("SCN") which will be based on parameters specified on scoring matrix. This indeed ensures transparency and accountability as to the imposition of penalties by RBI.
v) Action based on the nature of contravention:
Usually, the action was taken against the contravener irrespective of the nature of contravention and the fact that contraventions are quantifiable i.e. contraventions for which penalty can be considered as an appropriate action or non-quantifiable i.e. contraventions where penalty cannot be considered as an appropriate action, but now, the action taken by authority will depend upon the nature of contraventions whether it is quantifiable or non-quantifiable.
vi) Amount of monetary penalty:
The Act previously provided for a minimum penalty of INR 5 lakh for quantifiable contraventions while for non-quantifiable contraventions minimum penalty of INR 5 lakh and a maximum penalty of INR 1 crore was imposed. This has been changed to an objective methodology merged into a scoring matrix to determine the amount of penalty for contraventions.
vii) Contraventions that can be compounded:
Under the previous framework, all kinds of contraventions were compounded whereas under the current amendment there is an explicit list of offences which can be compounded such as:
- Failure to comply with terms and conditions of RBI
- Failure to produce any information or furnish any statement, returns or documents, etc., to RBI
- Disclosure of any information prohibited under Sec 22 of the Act.
- Non-compliance/contravention of any provisions of the Act
- Violation of KYC/AML4 norms
- Delay in submission or incorrect submission of various statutory returns/ documents etc.,
- Issues in the maintenance of nodal/escrow accounts
- Breach of limits in loading, fund transfers, etc., of PPI's5
- Inadequacies in the storage of payment system data in India
- Any other contravention of directions/instructions.
PROCEDURE INVOLVED IN IMPOSITION OF PENALTIES
Following is the list of procedures that must be followed for the imposition of penalties:
- Information is to be provided to the RBI regarding the contravention.
- On receiving the information, additional information will be sought by RBI from the contravener.
- If the RBI is satisfied that there is contravention then it will issue a "Letter of Explanation" to the contravener.
- The contravener should provide an explanation to RBI and if it is not satisfied with the explanation provided by the contravener then it will issue SCN to the contravener.
- On the issue of SCN, the contravener has to appear before authorities for which a hearing will be conducted and proceedings will be initiated against the contravener.
- After giving the contravener a reasonable opportunity of being heard, the order will be passed regarding the amount of penalty that will be passed by RBI.
- The amount of penalty should be deposited within 30 days from the date of passing orders failing which appropriate action will be taken by RBI against the contravener.
- On payment of penalties, entities should disclose the penalty in the books of accounts and the RBI will disclose on its website.
PROCEDURE INVOLVED IN COMPOUNDING OF OFFENCES
Following is the list of procedures that must be followed for the compounding of offences:
- An application for compounding offences should be filed to the Chief General Manager, Payment and Settlement Systems, RBI by the contravener.
- The authorities shall examine the application made by the contravener for the compounding process.
- After examining the application, the RBI will ask for any information or records which is relevant to the contravention from the contravener.
- After processing the application, hearings shall be conducted by RBI wherein the contravener will be given a reasonable opportunity of being heard.
- If the authority is satisfied with the reasons given by contravener as to why the offences are to be compounded then it will pass an order for compounding within 6 months from the date of filing the application for compounding.
The amendment intends to remove the ambiguities in Section 30 and 31 of the Act 2007 and tries to be stricter with the Payment System Operators and banks to prevent unauthorised operation but the point to be noted is that there are still some inadequacies which need serious attention. Firstly, the amendment, although imposes a penalty on unauthorised payment system operators and intends to be stricter with payment system operators, does not provide an appropriate remedy against the breach of data privacy by such operators.
Secondly, the amendment, although lays down separate procedures for the imposition of penalty and compounding of offences, it is to be noted that there are possibilities of misuse of the procedures.
Overall, the amendment has been framed to ensure safety and security of payments but whether the amendment will prevent the filing of PIL against the unauthorised operation of payment system by payment system operators due to failure of authorities to take appropriate action like in the case of Google Pay and Pay-Pal (which is pending in the court) still remains a questionable fact.
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