The Reserve Bank of India ('RBI') vide Notification No. RBI/2023-24/80 CO.DPSS.POLC.No.S-786/02-14-008/2023-24 dated 31 October 2023, has issued a new regulatory framework for Payment Aggregators of Cross Border Transactions ('PA-CB Regulation'). The said regulation shall govern all entities, including AD Banks, engaged in the processing / settlement of cross-border payment transactions for import and export of goods and services.
Prior to the introduction of the said notification, payment aggregators were governed by various circulars issued by the RBI which allowed for the said Online Payment Gateway Service Providers ('OPGSP') to enter standing arrangements with AD Banks for repatriation of export and import related remittances subject to conditions as were prescribed under the notifications.
With the onset of the PA-CB Regulation, all entities facilitating cross-border payment transactions ('PA-CB') for import and export of goods and services will come under direct regulation of the RBI.
The Regulation distinguishes the service providers into three kinds: (A) Export only PA-CB (PA-CB-E); (B) Import only PA-CB (PA-CB-I); and (iii) Export and Import PA-CB (PA-CB-E&I). The regulation specifies for specific conditions for each type of services provided.
Need of the PA-CB Regulations
Multiple-modes of cross border payments under one umbrella: Prior to the PA-CB Regulation, businesses had limited options of payment settlement of any import-export e-commerce transactions. It has been noted that businesses were opting for receipt of cross-border payments through correspondent banks, Money Transfer Service Scheme (MTSS), Rupee Drawing Arrangement (RDA) and postal channels as noted by the World Bank in its reports.
The PA-CB Regulations seem to be a direct attempt at plugging the issue of alternative methods of facilitation of payments by bringing all entities under the umbrella of PA-CB if any cross-border payment is being facilitated.
Tapping of illegal cross border transactions: Further, the requirement of compulsory registration with the FIU-IND has come at a time when the Mahadev betting app scam has been unearthed where cross-border payments were being made through varied side channels.
It is pertinent to note that this requirement is also a reflection of the compliance requirements under the RBI Master Direction - Know Your Customer (KYC), 2016 as amended in October 2023 which requires regulated entities to undertake diligence to identify accounts facilitating illegal cross-border transactions and report suspicious transactions to the Financial Intelligence Unit – India.
Further, the Delhi High Court in a recent pronouncement of Paypal Payments Private Limited v. Financial Intelligence Unit India, issued an interim order that fintech entities like Paypal are covered under the definition of 'payment system operators' under the Prevention of Money Laundering Act, 2002 and therefore must comply with the requirements under the same.
Thus, the PA-CB Regulations seem to be an attempt to plug any lacunae that existed so far so as to ensure that no transmission of money is being undertaken for illegal activities.
Due-Diligence of PA-CB: Prior to the PA-CB Regulations, Fintech entities engaged in facilitating cross-border transactions were only subject to the due-diligence of the AD Banks and subsequent transactions were merely required to be reported to the AD Bank. With the onset of the said regulations, all PA-CBs shall be under direct scrutiny of RBI and RBI shall also have visibility on transactions being facilitated through the same.
Relaxation on Import of Services: Under the OPGSP circular, cross-border payments were only permitted for import of goods and software. However, with the onset of the PA-CB Regulations, import of services other than software can also be facilitated which is a welcome introduction by the industry.
Monitoring of revised TCS on LRS: Revised TCS rates were introduced from 1 October 2023, for sending money overseas through the Liberalised Remittance Scheme ('LRS') for instances such as international travel and sending money abroad. With the onset of the PA-CB Regulations, the government has ensured a double check mechanism to monitor such transactions and ensure that all cross-border remittances are accounted for, and adequate tax is paid on the same.
Impact on Indian businesses
PA-CB Regulations have enabled non-bank entities to facilitate transactions directly between entities without having engaging with AD Banks to facilitate the same. However, this has come at the cost of being under the direct governance of RBI and heavy compliance requirements equivalent and more to a domestic payment aggregator.
Compliance requirements for non-bank entities under PA-CB Regulation
The PA-CB Regulation provides that non-banks that provide PA-CB services as on date of the circular must:
- register with Financial Intelligence Unit-India ('FIU-IND') as a pre-requisite;
- apply to the RBI for authorisation by 30 April 2024. It specifies that the entities shall be permitted to continue their services pending RBI authorisation;
- comply with the 'Processing and Settlement of Export related receipts facilitated by Online Payment Gateways – Enhancement of the value of transaction' guidelines issued by RBI vide circular dated 17 March 2020;
- seek approval of the Department of Payment and Settlement Systems ('DPSS'), RBI and Central Office ('CO') within 60 calendar days from the date of this circular or if it's a new business, prior to commencement of business. Further, in case the entity wants to change its activity category, then the same must also be informed to DPSS, RBI and CO at least 60 calendar days prior to the change;
Further, the non-bank PA-CBs must fulfil the following net worth criteria:
- Non-banks providing PA-CB services as on the date of this circular, must have a minimum net-worth of ₹15 crore at the time of submitting application to the RBI and a minimum net-worth of ₹25 crore by 31 March 2026;
- New non-bank PA-CBs must have a minimum net-worth of ₹15 crore at the time of submitting application to the RBI for authorisation and must attain a minimum net-worth of ₹25 crore by end of the third financial year of grant of authorisation.
PA-CB compliances for import transactions:
- Import only PA-CBs are required to maintain an Import Collection Account ('ICA') with an AD Category-1 scheduled commercial bank.
- The PA-CB must receive all payments in an escrow account which must then further be transferred to the ICA from which the amount can be credited to the foreign merchant.
- The PA-CB may permit payment of imports through any payment instrument provided by authorised payment systems in India, except small PPIs.
PA-CB compliances for export transactions:
- Export only PA-CBs are required to maintain an Export Collection Account ('ECA') denominated in Indian Rupees and / or foreign currency (for which separate currency accounts are required to be maintained) with an AD Category-1 scheduled commercial bank in which the export proceeds can be credited in the relevant currency. From the ECA the payment is transferred to the account of the Indian merchant.
- Non-INR currency settlement is only allowed for directly onboarded merchants.
All PA-CBs are required to conduct Customer Due Diligence for merchants directly on-boarded by it, which includes e-commerce marketplaces for both import and export transactions. In furtherance to this, for import, PA-CBs must conduct Buyer Due Diligence for buyers if goods or services more than INR 2,50,000 per unit is imported.
The PA-CBs are required to ensure that no payment is facilitated for the import or export of prohibited/restricted goods and services under the prevailing Foreign Trade Policy.
That being said, the PA-CB Regulation has introduced significant amount of transparency in all cross-border transactions and increased the accountability of the PA-CBs for transactions. Further, registration requirement with FIU-IND will help curb money laundering activities.
With the introduction of a system for streamlined movement of money through separate escrow accounts and a transparent methodology for settling of transactions through PA-CBs, there is a lot of confidence being instilled in businesses engaging in cross border transactions. Thus, while the Indian Businesses are delighted with the introduction of the said guidelines, Fintech companies will have to overcome the challenge of meeting the vast compliance requirements to operate in the said space.
All companies engaged in the cross-border payments systems such as e-commerce entities, global direct-to- customer entities will be required to re-look at their payment partner agreements, money flow, KYC and reporting requirements.
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.