ARTICLE
19 August 2025

Fintech Newsletter Recent Legal Developments And Market Updates From India

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CMS INDUSLAW

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CMS INDUSLAW is a top-tier full-service law firm and the 7th largest in India* with offices in Bengaluru, Chennai, Delhi, Gurugram, Hyderabad and Mumbai, which give it a pan-India presence. With more than 400 lawyers committed to client service, CMS INDUSLAW advises clients globally on Indian law. CMS INDUSLAW supports its clients’ transactional goals, business strategies and regulatory and dispute resolution needs. The CMS INDUSLAW team collaborates across practice areas, sectors and locations, navigating legal complexities and resolving legal issues efficiently for its clients.
As we progress through the second half of 2025, India's fintech sector remains active across both regulatory and market fronts, with notable shifts in digital payments, trading platforms, compliance frameworks...
India Finance and Banking

Introduction

As we progress through the second half of 2025, India's fintech sector remains active across both regulatory and market fronts, with notable shifts in digital payments, trading platforms, compliance frameworks, and institutional supervision.

The Securities and Exchange Board of India ("SEBI"), in coordination with stock exchanges, has rolled out measures to improve investor security and data governance, including mandatory twofactor authentication for online trading access and a new framework for brokers distributing third-party financial products. SEBI has also moved ahead with a standardised UPI handle mechanism for intermediaries, aimed at reducing payment fraud and streamlining fund transfers.

In parallel, the Reserve Bank of India ("RBI") has notified important amendments to the know your customer ("KYC") framework, placing stronger obligations on regulated entities in relation to the updation of customer records of individuals in a timely manner, and allowing banks to use business correspondents for KYC verification in select cases. The RBI has also continued its supervisory enforcement activities, including cancellation of regulated entity registrations and monetary penalties for KYC non-compliances.

In this edition of the Fintech Newsletter, we provide an overview of these legal developments and market updates which emerged in the Indian fintech ecosystem in June 2025.

Recent Legal & Regulatory Developments

Stock Exchanges Reiterate Mandatory Two-Factor Authentication for Online Client Logins

National Stock Exchange1 and Bombay Stock Exchange ("Stock Exchanges")2, in consultation with SEBI, have reiterated the requirement for stockbrokers to implement Two-Factor Authentication ("2FA") for client logins on Internet-Based Trading ("IBT") and Securities Trading through Wireless Technology ("STWT") platforms. Such 2FA may include biometric authentication, where feasible. The Stock Exchanges have further advised stockbrokers to terminate all client sessions at the time of end-of-day processing or at a predefined interval, and to allow re-login only upon successful completion of 2FA.

Stock Exchanges Issue Framework for Distribution of Third-Party Products by Trading Members

Stock Exchanges, in consultation with SEBI, have issued a regulatory framework governing the distribution of third-party products ("TPPs") by trading members ("Brokers") through their own platforms or through those operated by group or holding entities ("Parent Apps").

To address regulatory and investor protection concerns, the framework introduces a series of conditions that Brokers and affiliated entities must adhere to when facilitating access to TPPs. The framework, inter alia, provides guidelines such as (i) disclosure requirements to clients, (ii) data confidentiality and segregation of client data, (iii) direct agreements between TPP providers and clients, and (iv) compliance with the advertisement codes prescribed by SEBI, Stock Exchanges, or the relevant financial sector regulator.

SEBI Introduces Standardised Validated Unified Payments Interface ("UPI") IDs for Secure Payments to Market Intermediaries

SEBI has issued a circular titled 'Adoption of Standardised, Validated and Exclusive UPI IDs for Payment Collection by SEBI Registered Intermediaries from Investors' effective October 1, 2025, pursuant to which SEBI will introduce a structured and validated UPI address mechanism featuring an exclusive "@valid" handle for all SEBI-registered investor-facing intermediaries. Through this mechanism, investors will have the option to transfer funds directly to the validated bank accounts of intermediaries.

While use of this mechanism by investors remains optional, it is mandatory for all SEBI-registered intermediaries to obtain and make this structured UPI address available to their investors. This initiative is designed to enhance payment security, reduce fraud risks, and streamline transaction processes between investors and market participants.

SEBI Introduces Settlement Scheme for Stockbrokers Associated with Certain Algo Platforms

SEBI has introduced a Settlement Scheme ("Scheme") aimed at providing a one-time settlement opportunity to stockbrokers registered under the SEBI (Stock Brokers) Regulations, 1992, who were associated with certain algorithmic trading platforms and against whom proceedings have been initiated and are currently pending before SEBI's Adjudicating Officer, the Securities Appellate Tribunal, or courts.

The Scheme enables eligible stockbrokers to settle the proceedings and seek expedited closure of their cases. It will be operational for a limited period (from June 16, 2025, to September 16, 2025).

A fixed settlement amount of INR 1 (one) Lakh per stockbroker has been prescribed under the Scheme. In cases where a settlement application had already been filed before the Scheme's commencement and remains pending, no fresh application is required; however, such applicants must still complete payment and documentation formalities via the designated link.

Following the closure of the Scheme and reconciliation of records, SEBI will issue a composite settlement order. If the Scheme is not availed, pending proceedings shall continue in accordance with applicable securities laws.

IFSCA Issues Policy Directions on Participation of Payment Service Providers in International Payment Systems

The International Financial Services Centres Authority ("IFSCA") has issued policy directions governing the participation of Payment Service Providers ("PSPs") in international payment systems, under powers conferred by the Payment and Settlement Systems Act, 2007 and the IFSCA Act, 2019.

Under the new framework, PSPs must obtain prior approval from the IFSCA to join international payment systems involving cross-border payments with banks or financial institutions outside the IFSC. Where such systems enable transactions within IFSC, including between PSPs and financial institutions, authorisation under Section 7(1) of the Payment and Settlement Systems Act, 2007 is also required.

PSPs must review their participation in international payment systems in line with these requirements and submit a compliance report to the Department of Banking Supervision. Additionally, they must provide a list of international payment systems in which they were participants as of May 31, 2025.

RBI issues Master Direction – Reserve Bank of India (Electronic Trading Platforms) Directions, 2025

The RBI has issued the Master Direction – Reserve Bank of India (Electronic Trading Platforms) Directions, 2025 ("ETP Directions"). The ETP Directions, which come into immediate effect, supersede the Electronic Trading Platforms (Reserve Bank) Directions, 2018, and establish a comprehensive regulatory framework for entities operating Electronic Trading Platforms ("ETPs") for transactions in eligible instruments.

The ETP Directions, inter alia, provide for the following: (i) mandatory prior authorisation for all ETP operators, with eligibility criteria including Indian incorporation, minimum net worth of INR 5 (five) Crore, and relevant experience; (ii) operating norms covering access, membership, trade transparency, and dispute resolution mechanisms; (iii) comprehensive risk management and surveillance requirements, including for algorithmic trading systems; (iv) data preservation, confidentiality, and reporting obligations, including periodic reporting to RBI and relevant authorities; and (v) norms for outsourcing.

SEBI issues investor charters for Intermediaries

SEBI has issued several circulars which provide the investor charter for Real Estate Investment Trusts,3 Infrastructure Investment Trusts,4 Investment Advisers,5 and Research Analysts6 ("Intermediaries"), in order to enhance financial consumer protection alongside enhanced financial inclusion and financial literacy, in light of the recent developments in the securities market such as the introduction of Online Dispute Resolution (ODR) platform and SCORES 2.0. The investor charters for the Intermediaries summarise the services provided by the relevant Intermediary to their clients, rights of investors, timelines prescribed on stockbrokers for completion of various processes such as KYC, client onboarding, order execution, grievance redressal, etc., Do's and Don'ts for investors, among others. Additionally, the aforesaid circulars also require that the Intermediaries disclose the data on complaints received against them or against issues dealt with by them and redressal thereof on a monthly basis in the format prescribed therein.

Footnotes

1. Available here.

2. Available here.

3. Available here.

4. Available here.

5. Available here.

6. Available here.

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