India: Revamped Prepaid Payment Instrument Law Focuses On KYC, Interoperability, Consumer Protection And Data Security

Last Updated: 11 December 2017
Article by Aaron Kamath, Kartik Maheshwari, Jaideep Reddy and Karan Kalra
  • Existing entities to comply by December 31, 2017
  • Stricter eligibility requirements: net worth, financial regulator NOC, 'fit and proper' status
  • Detailed KYC required for semi-closed and open PPIs over INR 10,000 (approx. USD 155)
  • Detailed information security and consumer protection guidelines prescribed
  • Focus on introducing interoperability amongst e-wallets and between e-wallets and banks

Introduction

The Reserve Bank of India ("RBI") recently issued a new Master Direction on Issuance and Operation of Prepaid Payments Instruments1 ("Master Direction"). Given that the Master Direction was effective from the day of its release, existing issuers of prepaid payment instruments ("PPIs") have been given time to comply with the new rules on or before December 31, 2017. The Master Direction supersedes previous RBI guidelines dealing with the issuance and operation of PPIs.2

The Master Direction follows from a public consultation process that the RBI had conducted earlier this year where in March, 2017, it had released the draft form of the Master Direction on Issuance and Operation of Prepaid Payments Instruments ("Draft Direction"), inviting comments from stakeholders and the general public. Nishith Desai Associates had also submitted its comments on the Draft Direction.

In this hotline, we discuss the significant changes introduced by the RBI in the Master Direction.

Eligibility and authorization process

  1. Net worth: Previously, PPI issuers were required to have a minimum paid-up capital requirement of INR 5,00,00,000 (approx. USD 776,500) and a separate minimum positive net worth requirement of INR 1,00,00,000 (approx. USD 155,000). Now an all-inclusive definition of 'net worth' has been added with a single requirement of a minimum positive net worth of INR 5,00,00,000 (approx. USD 776,500) on day one, with a requirement that PPI issuers must achieve a minimum positive net worth of INR 15,00,00,000 (approx. USD 2,329,500) within 3 years of receiving the PPI authorization.3 Existing PPI issuers must achieve this target as on March 31, 2020.
  2. Financial regulator NOC: Both banks and non-banks regulated by any "financial sector regulator" and seeking authorization under the Master Direction must submit a No Objection Certificate (NOC) from their respective regulator as part of the application for authorization. This is a new requirement.
  3. 'Fit and proper' status: The RBI has extended the fit and proper criteria (which typically applies to banks and NBFCs) to entities applying for authorization under the Master Direction. Therefore, RBI will now "check the 'fit and proper' status of the applicant and management by obtaining inputs from other regulators, government departments, etc., as deemed fit."
  4. In-principle approval: Under the earlier regime, the approval of an application resulted in a full-fledged Certificate of Authorization. Now, the Master Direction creates the concept of a six-month in-principle approval. The RBI will first issue the in-principle approval, and it may thereafter impose additional conditions or withdraw the approval if "adverse features" come to light. If the eligibility conditions continue to hold good for the six-month period, a Certificate of Authorization will be issued.
  5. No automatic approval for banks: Previously, banks and NBFCs did not need separate RBI approval to issue PPIs. Now, any entity, including a bank that wishes to issue a PPI must receive specific approval in this connection from the RBI.

1. Types of PPIs

The rules relating to each type of PPI have been made more detailed, and each type of PPI is now regulated in a more distinct fashion.

  1. Closed System PPIs: These PPIs are issued by an entity for facilitating the purchase of goods and services from that entity only (and not from third parties). There are no major changes specific to closed system PPIs.
  2. Semi-Closed System PPIs: These PPIs are used for the purchase of goods and services from designated third parties which have a specific contract with the issuer, either directly or through a payment aggregator or payment gateway, to accept the PPIs as payment instruments. The earlier categories have been revised as below:

    a) Semi-Closed PPIs up to INR 10,000 (approx. USD 155): These can be issued with "minimum details" of the customer, including the mobile number verified with One Time Pin (OTP) and a self-declaration with the name and unique identification number of any officially valid document.4

    b) Semi-Closed PPIs up to INR 1,00,000 (approx. USD 1,550): For this category of semi-closed PPIs, full KYC requirements are applicable i.e., the same level of KYC as required for opening a bank account. There is a monthly funds transfer limit of Rupees 10,000 (approx. USD 155), barring exceptions. More detailed norms are prescribed than under the earlier rules, such as the ability to transfer funds 'back to source' and the facility of pre-registered beneficiaries.

  3. Open System PPIs: These are PPIs that can be used at any merchant for purchase of goods and services, and also can be used for cash withdrawal. It has been clarified in the Master Direction that only banks can issue open system PPIs. Under the earlier regime, non-banks could issue such PPIs. The rules regarding this category have also been made more detailed, and largely resemble the rules for the second category of semi-closed PPIs, including the rules on 'back to source' and pre-registered beneficiaries as mentioned above.

2. Other Instruments

The Master Direction has done away with many different categories of PPIs that were in existence and has provided that in addition to the above, PPI issuers can only issue PPIs of the following two categories:

  1. Gift instruments: (Maximum value of INR 10,000 (approx. USD 155)). This is effectively a one-time gift card which is provided by several merchants to use on their website / own store. Such instruments cannot be made reloadable.
  2. PPIs for Mass Transit Systems (PPI-MTS): These are semi-closed PPIs issued by mass transit system operators after authorization to issue and operate such PPIs. Typically, this kind of PPI is used for availing of public transportation facilities as well as paying toll for private vehicles. Such PPIs should be reloadable and the maximum value outstanding such PPIs cannot exceed INR 3,000 (approx. USD 45) at any point. No cash-outs, refunds or fund transfers are allowed for this type of PPI.

Another addition worth noting is that cross-border outward transactions have now been permitted under the Master Direction. KYC-compliant reloadable semi-closed and open system PPIs (INR denominated) issued by authorised banks are permitted to be used in cross-border outward transactions. This will be only for permissible current account transactions under the Foreign Exchange Management Act, 1999 i.e., purchase of goods and services, and not for cross-border outward fund transfer or for remittances under the Liberalised Remittance Scheme.

3. Interoperability

The Master Direction provides for interoperability amongst PPIs5 and essentially prescribes that interoperability should be enabled in phases. In the first phase, PPI issuers (both banks and non-bank entities) should make all KYC compliant PPIs issued in the form of wallets interoperable amongst themselves through the Unified Payments Interface ("UPI")6 within 6 months from the date of issue of the PPI Direction. In subsequent phases, interoperability should be enabled between wallets and bank accounts through UPI.

4. Conversion of existing PPIs

PPI issuers would need to give PPI holders the option to convert the existing semi-closed and open system PPIs issued to them into various types of PPIs based on KYC requirements, and after conducting applicable due diligence, on or before December 31, 2017. In cases where such conversion is not opted for by PPI holders, such PPIs should be mandatorily converted into minimal KYC PPIs.

5. Other Important Provisions

  1. Validity & Redemption: All PPIs issued in India should have a minimum validity of 1 year from the date of last loading / re-loading of the PPI. PPIs with no financial transaction for a consecutive period of 1 year should be reported to RBI and be made inactive. Re-activation would entail a due diligence by the PPI issuer.
  2. Refunds: Like the case was earlier, refunds, in cases of failed / returned / rejected / cancelled transactions, are required to be made to the PPI from which the initial payment was debited. Pertinently, the RBI had earlier this year released a circular pertaining to customer protection and limiting the liability of customers in unauthorized electronic banking transactions.7 Click here for our update and analysis on this circular.
  3. Security & Audit PPI issuers should put in place a Board-approved information security policy for the security and safety of the PPIs covering critical areas of concern like login security issues, authentication of successive payment transactions, and additional factor of authentication as required for debit cards. Detailed regulations for the same have now been prescribed. Furthermore, PPI issuers should, in addition to reporting to RBI and CERT-In, establish a mechanism for monitoring, handling and follow-up of cyber security incidents and cyber security breaches. Non-banking entities issuing PPIs should submit a systems audit report including security audit conducted by a CERT-IN empaneled auditor, within 2 months of the close of the financial year.8 Given that the Central Government recently appointed a committee to propose a new, horizontally applicable data protection framework for India, PPI issuers will have to be mindful of the requirements under both regimes. In the event of any conflict between the two, the stricter standard will likely need to be followed.

Conclusion

The Master Direction significantly increases the compliance burden on PPI issuers on various fronts: data security, KYC, audits, disclosures and grievance redressal. Some commentators have questioned whether the PPI regime will result in e-wallets losing their edge over traditional financial offerings.9 This is because many of the new requirements resemble those required for banks and NBFCs.

However, given the increase in the use of PPIs in India, consumer protection concerns seem to warrant increased regulation. The RBI November 2017 Bulletin disclosed that as of September 2017, PPI volumes stood at 240.29 million (as opposed to 97.07 million in September 2016), and PPI values stood at INR 109.77 billion (as opposed to INR 56.28 billion in September 2016).10 Mr. R. Gandhi, former RBI deputy governor, was recently quoted as saying, "if you don't insist on the same type of terms for banks and wallets, then there is clear arbitrage, and it is tantamount to picking a winner. If RBI doesn't lay terms of security and KYC, then wallets will be at a clear advantage."11 This statement appears to echo the rationale behind the revamped rules in the Master Direction.

We see the Master Direction as a welcome move. By facilitating a level playing field, it pushes for a regulated environment where there is uniformity and certainty. By increasing entry barriers and compliance requirements, the RBI is seeking to protect consumer interests and prevent systemic risk, considering the increased funds at stake. The move to promote interoperability amongst PPIs and bank accounts may also go a long way in promoting a cashless and digital economy in India by facilitating payments between PPIs and other PPIs and between PPIs and bank accounts.

Footnotes

1 Circular dated October 11, 2017. Available at https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11142&Mode=0. Last accessed: December 5, 2017.

2 Tables 1 and 2 of the Master Direction set out the circulars which have been fully and partly repealed. Significantly, the Policy Guidelines on Issuance and Operation of Pre-Paid Payment Instruments in India, 2009, as amended and consolidated from time to time, stands repealed.

3 If the PPI issuer is a bank, they would need to meet the necessary capital requirements applicable to banks.

4 This category of PPI now cannot be used for purposes other than the purchase of goods and services. Therefore, unlike earlier, peer-to-peer payments would not be permitted unless they are for such purchases.

5 The Master Direction states that separate operational guidelines will be issued on interoperability.

6 See http://cashlessindia.gov.in/upi.html. Last accessed: December 5, 2017.

7 Circular on Customer Protection - Limiting Liability of Customers in Unauthorized Electronic Banking Transactions, dated July 6, 2017. Available at: https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=11040. Last accessed: December 5, 2017.

8 Note: Banks will continue to be regulated by the RBI Circular on Cyber Security Framework in Banks, dated June 2, 2016.

9 See https://the-ken.com/rbi-kicked-off-shark-fight-wallet-users/#. Last accessed: December 5, 2017.

10 https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/RBIBNOV17ABB2DE5EA76F428980F42BE602988E90.PDF Last accessed: December 5, 2017.

11 https://the-ken.com/rbi-kicked-off-shark-fight-wallet-users/#. Last accessed: December 5, 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Aaron Kamath
Kartik Maheshwari
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions