The Payment and Settlement Systems Act, 2007 (PSS Act) governs the regulation and supervision of payment systems in India and designates the Reserve Bank of India (RBI) as the regulatory authority for this purpose. The Act empowers the RBI to establish a committee, namely the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), as a committee of its Central Board, to exercise its powers and perform its duties under the Act.
Key Provisions of the PSS Act, 2007
The Act provides a legal framework for critical concepts such as “netting” and “settlement finality”, which are essential because most payment systems in India, excluding the Real Time Gross Settlement (RTGS) system, operate on a net settlement basis.
Regulations under the PSS Act
Two key regulations have been issued under the PSS Act:
- Board for Regulation and Supervision of Payment and Settlement Systems Regulations, 2008
- Payment and Settlement Systems Regulations, 2008
Both regulations came into effect alongside the Act on August 12, 2008.
- The BPSS Regulations, 2008 govern the composition, powers, functions, and operational procedures of the BPSS, including the formation of sub-committees and conduct of meetings.
- The Payment and Settlement Systems Regulations, 2008 outline the process for applying for authorization to operate a payment system, as well as requirements related to payment instructions, reporting obligations, and submission of financial statements by system providers.
Definitions under the Act
Section 2(1) of the PSS Act defines several key terms, including:
- Payment Obligation: The obligation owed by one participant to another in a payment system, arising from payment instructions or related financial transactions.
- Payment Instruction: Any instrument or electronic authorization to effect payment between individuals or system participants.
- Settlement: The completion of payment obligations, which may be conducted on a net or gross basis.
- Payment System: A system that enables payments between a payer and a beneficiary, involving clearing, payment, or settlement services. It excludes stock exchanges and their clearing corporations (per Section 34 of the Act) but includes operations such as credit/debit card services, smart card services, and money transfer services.
Entities operating any such system are considered system providers and must perform clearing, settlement, or payment functions, or all three.
Authorization Requirements
Under Section 4, no person other than the RBI can operate or commence a payment system without authorization. Applications must be submitted as per Form A under Regulation 3(2) of the 2008 Regulations, accompanied by the requisite documents and a fee of ₹10,000 (excluding applicable GST).
Applications can be submitted through various payment modes, including electronic transfer. Operating a payment system without authorization constitutes an offence and may attract penal action.
Foreign Entities and Authorization
The PSS Act does not discriminate between foreign and domestic entities. All entities, regardless of origin, must obtain RBI authorization before commencing payment system operations in India (See Sections 4 and 18). Authorized foreign entities currently operating in India include MasterCard, Visa Worldwide, Western Union, and MoneyGram. A list of authorized entities is available at the RBI website.
Financial Market Infrastructures (FMIs)
FMIs are defined as multilateral systems used for clearing, settlement, or recording of payments, securities, derivatives, or financial transactions. Systemically important FMIs, such as Central Securities Depositories (CSDs), Securities Settlement Systems (SSSs), and Central Counterparties (CCPs) are considered payment systems under the PSS Act. FMIs are regulated according to the Principles for Financial Market Infrastructures (PFMIs) issued by the CPMI-IOSCO. Further details can be accessed via the RBI Oversight Framework.
RBI’s Role and Powers
The RBI evaluates authorization applications based on factors such as technical standards, risk management, security, financial status, consumer protection, and consistency with monetary policy (Section 7). It aims to process applications within six months.
Additionally:
- The RBI may refuse authorization, but must provide written reasons and a chance for the applicant to be heard.
- It may revoke authorization for non-compliance or violations (Section 8), with appeals permitted to the Central Government (Section 9).
- It may collect authorization fees and security deposits (Section 7).
- It may set operational standards, including format, timing, and participant criteria (Section 10).
- The RBI may inspect, demand information, and conduct on-site audits to ensure compliance (Sections 12–14).
- RBI can issue binding directions to system providers and participants (Sections 17–18).
Legal Recognition of Netting and Settlement Finality
The PSS Act grants legal sanctity to netting and settlement finality, ensuring that once settlement is determined, it is final and irrevocable, even in cases of insolvency. The Act also provides for loss allocation mechanisms where stipulated in system rules.
Duties and Dispute Resolution
System providers must operate in compliance with the Act, Regulations, and RBI directions. They are obligated to disclose rules and charges, maintain confidentiality of participant data, and follow dispute resolution mechanisms, including provision for dispute panels and escalation to the RBI or Central Government, as applicable (Sections 20–24).
Penal Provisions
Dishonour of electronic fund transfers due to insufficient funds is a criminal offence akin to cheque dishonour under the Negotiable Instruments Act, 1881 (Section 25). Other offences include unauthorized operations, non-compliance, and false statements, with penalties ranging from fines to criminal prosecution (Sections 26–30).
Related Posts
