The Indian fintech market has continued to grow and evolve, with the Covid-19 pandemic accelerating digitisation amongst consumers, micro, small and medium enterprises ("MSMEs"), banks and other financial institutions, including in rural and remote parts of India.First-time user cohorts who were constrained to transact digitally during government-imposed lockdowns early last year, have taken to using digital payment options in a big way, post the lockdown relaxations. In fact, more than two billion transactions were recorded in October, 2020 just through the Unified Payments Interface ("UPI").1Certain consumer behavioural changes with the recent pandemic, such as growth in the e-commerce sector, teleconsultations, online streaming and distance learning, are likely to continue fuelling the expansion of digital payments adoption in India in the long run.
In addition to the overall goal of a cashless economy through adoption of digital payment methods, there has been an increased focus on aspects such as contactless payments, interoperability in payment systems, tokenization, development of cross-border digital payments infrastructure, global outreach of India?s domestic payment systems, consumer protection, increased role of artificial intelligence and machine learning,anddata governance.
This newsletter highlights the key developments in the Indian fintech space from October 16, 2020 to December 31, 2020.
RECENT LEGAL DEVELOPMENTS
RBI's Regulatory Sandbox
Testing of products in Reserve Bank of India?s ("RBI") regulatory sandbox ("RS") announced last year, has started with two entities having initiated product testing from November 16, 2020, and with four more entities having started their test phase in December, 2020. The products in the first cohort include: (i) eRupaya?, a set of near-field communication- ("NFC") based prepaid cards and point-of-sale ("POS") devices to facilitate offline person-tomerchant ("P2M") transactions and offline digital products in remote locations; (ii) PaySe?, an offline digital cash product to help digitise payments in rural areas through an ecosystem of self-help groups; (iii) CityCash?, a set of NFC-based prepaid cards and POSdevices to facilitate offline P2M transactions, including for purchase of bus tickets; (iv) ToneTag?, an offline phone-based UPI payment solution for P2M transactions based on Interactive Voice Response between devices; (v) a voice-based UPI payment solution by Ubona Technologies to facilitate offline person-to-person ("P2P") and P2M transactions; and (vi) a product by Eroute Technologies to facilitate offline P2P or P2M transactions using SIM Tool Kit menu-based user interface.2
Through a notification dated December 16, 2020, the RBI has announced the opening of the second cohort under the RS with 'crossborder payments' as its theme, in order to spur technology-led innovations in the cross-border payments landscape with a low cost, fast, secure, convenient and transparent system. The RBI has also notified 'MSME lending' as the theme for the third cohort under the RS, details of which will be announced in due course.3
The RBI has further relaxed the eligibility criteria under the Enabling Framework for Regulatory Sandbox,4 by reducing the net worth requirement from the existing INR 25 lakh to INR 10 lakh, as well as allowing partnership firms and limited liability partnerships to participate in the RS. Interested applicants can apply for the second cohort under the RS from December 21, 2020 to February 15, 2021.
SEBI amends eligibility norms to enable fintech companies to sponsor AMCs
The Securities and Exchange Board of India ("SEBI"), in its board meeting on December 16, 2020,5 decided to relax the eligibility criteria applicable for sponsoring a mutual fund ("MF"). This will enable venture-backed fintech companies and other technology startups, which are not yet profitable, to sponsor and launch a mutual fund.6 To this extent, MF sponsors were earlier required to have a profitability-based track record and a minimum net-worth of INR 50 crores. Following SEBI?s recent decision, sponsors that do not fulfil the profitability criteria at the time of making the application, will also be considered eligible to sponsor a mutual fund, however, subject to having a networth of not less than INR 100 crores for the purpose of contributing towards the networth of the Asset Management Company ("AMC"), which has to be maintained till the time the AMC makes a profit for 5 consecutive years.
Discussion paper on scale-based regulatory framework for NBFCs
Taking note of the changing risk profile of non-banking financial companies ("NBFCs") as a result of their contribution and increased interconnectedness as a supplemental channel of credit intermediation alongside banks, the RBI is currently reviewing the regulatory framework for the NBFC sector. The RBI has pointed to a scale-based regulatory approach linked to the systematic risk contribution of NBFCs, as the way forward, and a discussion paper has been issued by the RBI for stakeholder consultation, inviting comments by February 22, 2021.7
Reserve Bank Innovation Hub
Pursuant to the Monetary Statement on Development and Regulatory policies dated August 06, 2020, the RBI had announced the setting up of the Reserve Bank Innovation Hub ("RBIH") to promote financial innovation and inclusion.
Through a press release dated November 17, 2020,8 the RBI has constituted a Governing Council to guide and manage the RBIH led by a Chairperson. The RBI has clarified that the RBIH will collaborate with financial sector institutions, the technology industry and academic institutions, to collaborate for exchange of ideas and development of prototypes.
2. https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR638EE786E4BD1BA41398F49E1E5A3AAE9CA.PDF; https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR829C10F132493024BD197A74FC56357AE3C.PDF
4. https://rbidocs.rbi.org.in/rdocs//PublicationReport/Pdfs/REGULATORYSANDBOX2333CA3224ED4B7991A2B55DBEFDA 745.PDF
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