The fintech space remains one of the fastest growing sectors in India, with companies evolving new business models to digitise more aspects of banking and financial services across payments, lending, insurance, wealth management and broking, as well as expanding their offerings into overseas markets. A number of internet companies in India, including fintech firms, are also looking to go public, which marks a new phase where new-age venture backed technology companies in India will, for the first time, be tested by the public markets.
Regulatory focus on the fintech industry comprises of three facets: consumer welfare, data security, and anti-money laundering. The first is often in conflict with the latter two, and the Indian government is working on policy developments to balance these competing interests. To this extent, the cryptocurrency industry continues to face regulatory uncertainty and resistance from the Reserve Bank of India ("RBI").
This newsletter highlights the key developments in the Indian fintech space from April 01, 2021 to June 30, 2021.
RECENT LEGAL DEVELOPMENTS
Prohibition on acquiring 'significant influence' from FATF non-compliant jurisdictions
The RBI has issued a circular1 clarifying that investments in Payment System Operators ("PSOs") from Financial Action Task Force ("FATF") non-compliant jurisdictions will not be treated at par with those from FATF compliant jurisdictions. To this extent, noncompliant jurisdictions are periodically identified by the FATF based on inadequate measures adopted in such jurisdictions in relation to combatting money laundering ("AML") and terrorist financing ("CFT"). The RBI had earlier issued a similar circular2 on investments in NBFCs from FATF noncompliant jurisdictions.
In its circular, the RBI further clarified that investors in existing PSOs, holding their investments prior to the classification of the source or intermediate jurisdictions as FATF non-compliant, may continue with the investments or bring in additional investments as per extant regulations to support continuity of the business in India. However, new investors from or through FATF noncompliant jurisdictions, whether in existing PSOs or in entities seeking authorisation as PSOs from the RBI, should not directly or indirectly acquire 'significant influence' in the investee PSO (i.e., fresh investments (directly or indirectly) from such jurisdictions in aggregate should be less than the threshold of 20% of the voting power (including potential voting power) of the PSO).
Setting up of the Regulations Review Authority 2.0
The RBI has decided to set up a new Regulations Review Authority (RRA 2.0),3 which, on the basis of internal reviews and feedback from industry stakeholders, will work to streamline the RBI's regulatory instructions and reduce compliance burden for regulated entities. This is proposed to be achieved by simplifying procedures, streamlining the reporting mechanism by allowing online submissions, revoking any obsolete instructions and duplications, and suggesting changes to the dissemination process of the RBI circulars/ instructions. This is a welcome development from the RBI which, if implemented successfully, will make it easier for regulated entities to navigate through the RBI's regulatory framework.
KYC norms relaxed for video-based processes
The RBI has amended4 its Master Direction on KYC ("KYC Directions") to set out certain minimum standards and operational compliances for regulated entities to leverage video-based customer identification processes ("Video KYC"). These use facial recognition coupled with audio-video interaction, as an alternate method of customer identification.
In particular, to accelerate the usage of Video KYC, the RBI has: (a) extended the scope of Video KYC and allowed its use to onboard new categories of customers, including proprietorship firms, authorised signatories and beneficial owners of legal entities, apart from just individual customers; (b) enabled its use to convert limited KYC accounts, opened on the basis of Aadhaar e-KYC, to fully KYCcompliant accounts; and (c) permitted the use of the KYC Identifier of the Centralised KYC Registry to validate identity during Video KYC, including submission of electronic documents through DigiLocker. The RBI has also simplified and rationalised the process of periodic updation of KYC.
Centralised Payment Systems to be opened up for non-bank entities
Membership to the Centralised Payment Systems ("CPSs") of the RBI – i.e., the RTGS and NEFT systems – has so far been limited to banks and select specialised entities like clearing corporations and financial development institutions. Recognising the increased importance and role of non-bank entities in the payments space (like Prepaid Payment Instrument ("PPI") issuers, Card Networks, White Label ATM operators, and Trade Receivables Discounting platforms), including their new technology-based offerings and customised solutions for users, the RBI has proposed to enable direct membership of regulated payment system operators in the CPSs in a phased manner (with necessary instructions to be issued separately).5 These entities, however, will not be eligible for any liquidity facility from the RBI to facilitate settlement of their transactions in the CPSs. The above proposal is intended to encourage further participation of non-bank entities across payment systems, boost the reach of digital financial services to more user segments, and minimise settlement risk in the financial ecosystem.
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