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TMI Blog2022 (10) TMI 508X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorisation, which is required to be enhanced to Rs. 25 crores by the end of the third FY of grant of authorisation. Such PAs are obliged to maintain a net worth of Rs. 25 crores from that point onwards. 4. Clause 8 of the 2020 Guidelines, amongst others, mandates that all non-bank PAs shall ensure that the amount collected by them is placed in an escrow account, maintained with a scheduled commercial bank. Furthermore, this clause also provides, that for maintenance of the escrow account, the operations of the PAs shall be deemed to be designated payment systems under Section 23A of the Payment and Settlement Systems Act, 2007 [hereafter the 2007 Act ]. 5. Importantly, Payment Gateways [hereafter referred to as PGs ] which are considered as technology providers or outsourcing partners of banks or non-banks are neither required to seek authorisation nor comply with the capital requirements stipulated in Clause 3 and 4 of the 2020 Guidelines. Background: 6. Petitioner no.1 is a company which is engaged in the business of providing recurring payment solutions for businesses in India via an authorised payment system known as the National Automated Cleari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The nodal bank account is maintained in a designated Nodal Bank. (b) The funds are remitted from the nodal bank account to petitioner no.1 s merchant clients/e-commerce marketing companies, as per pre-agreed terms and conditions contained in the Nodal Account Agreement. In effect, a three-day settlement period is provided for transmission of funds from the nodal bank account to petitioner no.1 smerchant clients/e-commerce marketing companies. 11.2 Petitioner no.1 has been carrying on the business of facilitating safe and secure online recurring transactions since 2016, in consonance with the instructions contained in the document dated 24.11.2009, titled Directions for opening and operation of Accounts and settlement of payments for electronic payment transactions involving intermediaries. [hereafter referred to as 2009 Directions ]. 11.3 The 2009Directions were issued by the RBI in the exercise of powers under Section 18 of the 2007 Act. 11.4 The 2020 Guidelines, which have been issued by RBI, purportedly while exercising powers under Section 18read with Section 10(2) of the 2007 Act travel beyond the powers conferred upon it. 11.5 The prescription contained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d-party interfaces, which facilitate e-commerce sites and merchants in accepting various payment instruments issued by their customers, and thus do away with the need to create an independent system for themselves. Therefore, the RBI via the 2020 Guidelines cannot bring the PAs/intermediaries, which are, at best, system participants, within the definition of the payment systems. 12.2 Clause 4 of the 2020Guidelines, which requires that for an entity to act as a PA, it should have a minimum net worth of Rs. 15 crores to begin with, and to have it scaled up to Rs. 25 crores by the end of the third FY, is a condition, which is manifestly unreasonable and arbitrary, and hence violative of Article 14 of the Constitution of India. Furthermore, it is not prudent to treat all kinds of PAs and PGs similarly. Such classification is unreasonable and is also violative of Article 14 of the Constitution. The stipulation contained in Clause 4 of the 2020 Guidelines concerning net worth does not conform to the object and purpose provided in the 2007 Act- which is, the regulation and supervision of payment systems in India. 12.3 Clause 4 of the 2020 Guidelines would stifle innovation and drive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re function of PAs is limited to providing a technical interface, and therefore does not need to have a beneficial interest in the money held on behalf of their merchant clients. 12.10 Furthermore, the impugned clause i.e., Clause 8has a myopic approach. At present, every PA operates multiple nodal accounts, and thus spreads the risk. If nodal accounts are done away with, it will expose the PAs to operational risks, which shall be detrimental to their business interests, as it has the potential of causing financial instability. 13. RBI s stand, that by opening an escrow account, the amount credited to the said account remains safe from the vagaries of liquidation and acts of fraud is untenable, for the reason that the PAs have no direct access to funds, which are retained in the nodal accounts. At present, banks which maintain nodal accounts are mandated to make pay-outs to merchant clients automatically, within three days of the conclusion of the transaction in issue, thereby eliminating any security risk concerning monies that are available in the nodal accounts. 13.1 The 2020 Guidelines fail the test of proportionality, as they mandate restrictive conditions for the ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dern Dental College Research Centre vs. State of M.P. (2016) 7 SCC 353 (para 60) 10. Mohd. Faruk vs. State of Madhya Pradesh 1970 SCR (1) 156 (para 10) 11. Mohd. Yasinvs. Town Area Committee AIR 1952 SC 115 (para 5) 12. Om Kumar vs. Union of India, (2001) 2 SCC 386 (paras 28,30) 13. Chintaman Rao vs. State of M.P. 1950 SCR 759 (para 6) 14. Union of India vs. Dinesh Engineering Corpn. (2001) 8 SCC 491 (para 12) 15. State of Rajasthan vs. Basant Nahata (2005) 12 SCC 77 (para 66) Submissions of respondent no.2/RBI: 14. Mr Gopal Jain, on the other hand, in response to and in opposition to the relief sought in the writ action, broadly made the following submissions: 14.1 Petitioner no.1, while acting as a PA provides services of aggregation in the online payment space, which inter alia involves collecting, netting and making payments. The term payment system as defined in Section 2(1)(i) of the 2007 Act captures the aforesaid activity. The provision defines a payment system as 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents had no beneficial interest in the amount retained in the nodal account. Therefore, it was considered prudent to manage the funds collected by the PAs on behalf of the customers through an escrow account, while providing a return on the core portion of the money retained therein. The PAs not only have a beneficial interest in the escrow account but are also entitled to interest on the core portion of the money retained in the escrow account. The purpose behind requiring PAs to retain money in an escrow account, albeit with a scheduled commercial bank, is to ensure that the funds collected by the PAs are put to proper use and effectively regulated. 14.9 It is submitted, that upon a review, PAs have now been allowed to maintain one additional escrow account in a different scheduled commercial bank, with the issuance of the circular dated 17.11.2020. Therefore, the argument advanced on behalf of the petitioners, that maintaining nodal accounts in different banks diversifies risks, and addresses business continuity concerns is answered by the issuance of the circular dated 17.11.2020. 15. Besides this, Section 23A of the 2007 Act empowers the RBI in public interest or, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said provision shall have a first and paramount charge on the balance held in that account, and the liquidator or receiver or assignee (by whatever name called) of the system provider of the designated payment system or the scheduled commercial bank concerned, whether appointed as provisional or otherwise, shall not utilise the said balance amount for any other purpose until all such persons are paid in full or adequate provision is made thereof. Pertinently, this sub-section opens with a non-obstante clause, and thus operates notwithstanding anything contained in the Banking Regulation Act, 1949 or the Companies Act, 1956 or the Companies Act, 2013, or even the Insolvency and Bankruptcy Code, 2016, or any other law for the time being in force. 15.5 Therefore, the contention advanced on behalf of the petitioners, that the RBI had arbitrarily declared PAs as designated payment systems in terms of Section 23A of the 2007 Act, is misconceived. This submission conveniently ignores the bona fide intentions of the RBI, which are to protect both the funds of the customers and ensure timely payments to the merchant clients. The impugned clause is necessary for ensuring effective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but does not include a stock exchange; Explanation . - For the purposes of this clause, payment system includes the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or similar operations; 16.2 Besides this, one will also have to set down what is the accepted work function of a PA. 16.3 Both parties in this regard have relied upon the RBI's Discussion paper, published on its website on 17.09.2019. The glossary section of the said Discussion paper defines a PA as an intermediary in an online payment transaction accepting payments on behalf of the merchant from the customers and then transferring the money to the merchant s account. 16.4 Therefore, in any digital payment transaction, there is a payer and a beneficiary. The interface is the PA, which ensures that the money is transferred to the designated nodal account, and after a gap of a stipulated timeframe, which the petitioners say is three days, a settlement takes place and funds are transmitted to the merchant s account. 16.5 However, under Clause 8 of the 2020 Guidelines, the PAs are required to maintain an escrow account with a sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of relevant changes which have occurred since the enactment was originally framed but does not alter the meaning of its wording in ways which do not fall within the principles originally envisaged by that wording. Updating construction resembles so-called dynamic interpretation but insists that the updating is structured rather than at large. This structuring is directed to ascertaining the legal meaning of the enactment at the time with respect to which it falls to be applied. The structuring is framed by reference to specific factors developed by the courts which are related to changes which have occurred (1) in the mischief to which the enactment is directed, (2) in the surrounding law, (3) in social conditions, (4) in technology and medical science, or (5) in the meaning of words 9.2 The updating principle on account of development of medical science and technique was applied in the following case: R v. Ireland, [1998] AC 147. 9.3 Similarly, change in social conditions have persuaded courts to apply the updating construction principle to inject contemporary meaning to the words and expressions used in the existing statute. See: Williams and Glyn's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Objects and Reasons of the 2007 Act states so in so many words. 17. Importantly, the Statement of Objects and Reasons of the 2007 Act, as amended on 13.05.2015 [ The Payment and Settlements (Amendment) Act, 2015 ] brings forth this aspect of the matter, and the rationale for making the amendments (i.e., to secure the interests of the customers to fore). The relevant part of the Statement of Objects and Reasons of The Payment and Settlements (Amendment) Act, 2015 are extracted hereafter- Prefatory Note Statement of Objects and Reasons. The Payment and Settlement Systems Act, 2007 (the said Act) was enacted for the regulation and supervision of payment systems in India and to designate the Reserve Bank of India as the authority for that purpose and for matters connected therewith. 2. Subsequent to the enactment of the said Act, the country has witnessed orderly growth of payment systems, and these payments systems are granted authorisation on the principles of safety, security, soundness, efficiency and accessibility. After the global financial crisis in 2007-08, several developments took place, driven primarily by the G20, for reforming the Over the Counter derivat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual handling of funds 17.2 Therefore, in our view, the answer to the poser, as to whether PAs fall within the ambit of the definition of payment system can only be in the affirmative, for the reasons given above. That being said, as alluded to above, there is, perhaps, merit in the responses received by the RBI to its Discussion paper, that separate legislation may have to be enacted for payment services. This aspect, however, falls in the domain of the legislators. The executive could consider this suggestion, and initiate necessary steps in that behalf. 17.3 Thus, the argument advanced on behalf of the petitioners, that the 2020 Guidelines, in particular, the impugned clauses are beyond the purview of the parent statute, is not tenable. Once it is accepted, that the work function performed by PAs comes within the definition of a payment system, then, as contended on behalf of RBI, it was well within its powers to frame the 2020 Guidelines, the source for which can be traced to Section 10(2) and Section 18 of the 2007 Act. These two provisions read as follows- 10. Power to determine standards.- .. (2) Without prejudice to the provisions of sub-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by RBI to the Discussion paper published on its website. 17.8 Contextually, it is relevant to note that RBI has taken an emphatic stand in its counter-affidavit, that it had received 57 responses to its Discussion paper, and that out of the 57 respondents, only 19 objected to a minimum net worth requirement of Rs 100 crores proposed in the Discussion paper. On behalf of the RBI, it has been conveyed to us, that despite a vast majority of respondents not objecting to a minimum net worth requirement of Rs.100 crores, it was deemed fit to reduce the minimum threshold to Rs 15 crores. This stand of the RBI clearly emerges upon a perusal of paragraph 18 of its counter-affidavit. 17.9 It needs to be emphasised, that when such eligibility criteria are fixed, or applicants who wish to venture into business are regulated by the State and/or its instrumentalities, there is an element of approximation. If such criteria are to be questioned, the only area, perhaps open for scrutiny would be: whether or not there was some application of mind and/or deliberation, before framing the impugned criteria. Once the State and/or its instrumentalities are able to show that a process was follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007 Act. 19.2 As alluded to hereinabove, as a matter of fact, the RBI has issued a circular dated 17.11.2020 whereby PAs can maintain one additional escrow account. Therefore, the argument advanced on behalf of petitioners concerning the spreading of financial risk has been taken care of, to some extent, with the issuance of the said circular. 19.3 Besides this, since the operations of PAs are treated as designated payment systems, they would have the benefit of the firewall provided by sub-sections (2) and (3) of Section 23A. Sub-section (2) of section 23A, in no uncertain terms, provides that the balance held in the account or accounts referred to in sub-section (1) i.e., escrow accounts shall not be utilized for any purpose other than discharging the liabilities arising on account of the usage of payment service by the customers or for repaying to the customers or for such other purpose as may be specified by the RBI from time to time. 19.4 Likewise, subsection (3) of Section 23A, which opens with a non-obstante clause, provides that persons entitled to receive payment under subsection (2) of the very same section shall have a first and paramount charge on the balance ..... X X X X Extracts X X X X X X X X Extracts X X X X
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