2022 (10) TMI 508 - HC - Indian Laws

Validity of circular of RBI - directions issued to online payment gateway services - non-banking entities which offer payment aggregation services - main plank of the petitioners case rests on the argument, that PAs who perform the work of intermediaries do not fall within the scope and ambit of the definition of payment system incorporated in the 2007 Act - HELD THAT - Once it is held, that the work function of the PAs comes within the definition of a payment system, then axiomatically, the power to have them seek authorization from the RBI for operating as PAs gets traced to section 4 of the 2007 Act - there are no merit in the argument, that petitioner no. 1, if it chooses to function as a PA, should not be called upon to seek authorization from RBI, as per the criteria laid down in Clause 3 of the 2020 Guidelines. There are no merit in the submissions advanced on behalf of the petitioners concerning Clause 4 of the 2020 Guidelines, which obliges an applicant, who wishes to function as a PA, to have a minimum net worth of Rs.15 crores and have the same scaled up to Rs. 25 crores by the end of the third FY. RBI has demonstrated, that before the 2020 Guidelines were issued, the same was put up in the public domain in the form of a Discussion paper. The responses received were duly analysed, and as a matter of fact, the criteria contained therein were sculpted and moderated. Thus, in our view, the argument advanced qua fixing of a threshold limit vis- -vis minimum net worth seems untenable - there is merit in RBI's stand, that since PAs will handle funds provided by customers, RBI would require such applicants to enter the industry who have some amount of financial wherewithal. The 2009 Directions involved an indirect regulation and supervision of PAs. However, after RBI had put its Discussion paper in the public domain, the responses received by it were examined internally by the Board. The result of such deliberation convinced the RBI, that it should work on the third option outlined in the Discussion paper i.e., that which involved RBI's direct regulation and supervision of PAs since they were handling funds of customers. The difficulties put forth on behalf of PAs, perhaps are a small wrinkle, which cannot be the reason for striking down the impugned clauses of the 2020 Guidelines. The public interest element, which is imbued in the framing of the Guidelines, trumps the concerns raised by the petitioners. There are no merit in the writ petition - petition dismissed.

Summary

Issues Involved:
1. Validity of Clause 3 of the RBI's 2020 Guidelines requiring non-banking entities offering payment aggregation services to obtain authorization from RBI.
2. Validity of Clause 4 of the 2020 Guidelines mandating a minimum net worth for Payment Aggregators (PAs).
3. Validity of Clause 8 of the 2020 Guidelines requiring non-bank PAs to maintain an escrow account.

Detailed Analysis:

1. Validity of Clause 3 of the RBI's 2020 Guidelines:
The petitioners challenged Clause 3 of the 2020 Guidelines, which mandates that non-banking entities offering payment aggregation services must obtain authorization from the RBI. The petitioners argued that the RBI exceeded its powers under Section 18 and Section 10(2) of the Payment and Settlement Systems Act, 2007 (2007 Act) by requiring such authorization. They contended that Section 4 of the 2007 Act, which provides that no person other than the RBI can operate a payment system without authorization, does not apply to PAs as they act merely as intermediaries and not as payment systems. The court, however, concluded that PAs fall within the definition of "payment system" under Section 2(1)(i) of the 2007 Act, as they enable payment to be effected between a payer and a beneficiary, involving clearing, payment, or settlement services. Thus, the RBI was within its powers to frame the 2020 Guidelines and require PAs to seek authorization under Clause 3.

2. Validity of Clause 4 of the 2020 Guidelines:
Clause 4 of the 2020 Guidelines requires PAs to have a minimum net worth of Rs. 15 crores, which must be scaled up to Rs. 25 crores by the end of the third financial year. The petitioners argued that this requirement is unreasonable, arbitrary, and violative of Article 14 of the Constitution of India. They contended that such a high net worth requirement would stifle innovation and drive out small businesses and start-ups. The court found that the RBI had reduced the proposed net worth requirement from Rs. 100 crores to Rs. 15 crores based on feedback from stakeholders. The court held that the RBI's decision was based on deliberation and was aimed at ensuring that PAs handling customer funds have sufficient financial wherewithal. Therefore, the court found no merit in the challenge to Clause 4, holding that the requirement was neither unreasonable nor arbitrary.

3. Validity of Clause 8 of the 2020 Guidelines:
Clause 8 of the 2020 Guidelines requires non-bank PAs to place the amount collected from customers in an escrow account maintained with a scheduled commercial bank. The petitioners argued that this requirement disregards the current practice of maintaining nodal accounts and exposes PAs to operational risks. The court noted that the RBI had issued a circular allowing PAs to maintain one additional escrow account in a different scheduled commercial bank, addressing the concern of spreading financial risk. The court also highlighted that Section 23A of the 2007 Act empowers the RBI to require system providers to deposit collected funds in a separate account to protect customer interests. The court found that Clause 8 was a robust mechanism to protect the interests of customers, merchant clients, and PAs, and held that it was legally tenable.

Conclusion:
The court dismissed the writ petition, finding no merit in the challenges to Clauses 3, 4, and 8 of the 2020 Guidelines. The court held that the RBI was within its powers to frame the guidelines and that the requirements imposed were reasonable and aimed at protecting the interests of stakeholders in the payment ecosystem. The court emphasized the public interest element in the guidelines and concluded that it outweighed the concerns raised by the petitioners.