INTRODUCTION

The RBI issued a Circular dated October 31, 2023, titled "Regulation of Payment Aggregator – Cross Border (PA - Cross Border)" ("Circular"). The Circular primarily regulates entities that facilitate the processing or settlement of cross-border payment transactions for the import and export of goods and services (referred to as "PA-CB Entities"). The Circular creates a robust framework for the regulation and supervision of PA-CB Entities and introduces a licensing requirement which was previously reserved for payment aggregators. Unlike earlier, all PA-CB Entities are now mandated to obtain a license from the RBI under the Circular.

KEY TAKEAWAYS

Existing PA-CB Entities have to apply for the RBI license by April 30, 2024, and they are permitted to continue providing PA-CB services in the interim. However, PA-CB Entities have to ensure compliance with certain norms prescribed under the Circular by 31 January 2024. These include norms on merchant-onboarding, customer grievance redressal and a risk management framework.

Most notably, PA-CB Entities have to register themselves with the Financial Intelligence Unit-India ("FIU-IND") prior to applying for authorization with the RBI. As a result, PA-CB Entities will have to account for the time taken to apply and obtain FIU-IND registration and should ensure that the said registration is obtained before April 30, 2024.

In terms of capital requirements, the Circular requires PA-CB Entities to have a minimum net worth of INR 150 million as on the date of submitting their application for authorization.

The Circular also contains specific requirements and restrictions on the import and export of goods and services, the details of which can be found in the Annexure to this note.

COMPARATIVE ANALYSIS

Previous RBI regulations on cross-border export and import transactions, notably the Online Payment Gateway Service Provider Regulations issued in 2015 ("OPGSP Regulations"), were primarily focused on the obligations of authorised dealer banks ("AD Banks"). The OPGSP Regulations referred to PA-CB Entities as Online Payment Gateway Service Providers ("OPGSP") and AD Banks were expected to follow certain requirements while forming partnerships with OPGSPs, including the obligation to conduct due diligence on OPGSPs. The OPGSP Regulations did not require PA-CB Entities to obtain an RBI license or FIU-IND registration. Rather, the restrictions imposed on PA-CB Entities were minimal and limited to, amongst others, compliance with applicable laws, conducting due diligence while onboarding sellers, and installing a dispute resolution mechanism. Additionally, foreign entities seeking to operate as OPGSPs were required to open a liaison office in India with the RBI's approval before entering into arrangements with AD Banks. The monetary limit for imports and exports under the OPGSP Regulations was fairly low at USD 2,000 for imports and USD 10,000 for exports.

In 2022, the RBI released a draft circular (referred to as "Draft Regulations") which clarified the role and responsibilities of the AD Banks and PA-CB Entities while facilitating cross-border transactions. Even under the Draft Regulations, the RBI did not contemplate a licensing regime for PA-CB Entities.

In contrast to the OPGSP Regulations and Draft Regulations, the obligations outlined in the Circular primarily target PA-CB Entities. Unlike earlier, PA-CB Entities are now required to obtain a license from the RBI, and the operation of an Import Collection Account or Export Collection Account constitutes a designated payment system under the Payment and Settlement Systems Act, 2007 ("PSSA"). As a consequence, PA-CB Entities are subject to more rigorous requirements that were previously only applicable to payment aggregators.

Similarly, under the OPGSP Circular, foreign entities were permitted to operate as PA-CB Entities as long as they opened a liaison office in India with the RBI's approval. However, under the Circular, if a foreign entity intends to undertake operations as a PA-CB Entity, it has to set up an Indian subsidiary which is in the nature of a company. The Indian subsidiary company will have to apply for the license under the Circular and the foreign entity will have to ensure to adequately fund the subsidiary so that it meets the net worth requirements specified in the Circular.

The RBI's decision to regulate PA-CB Entities is likely to have been influenced by the decision of the Delhi High Court ("Court") in the PayPal case. In this case, PayPal was directed by the FIU-IND to register as a reporting entity under the Prevention of Money Laundering Act, 2002 ("PMLA"). Under the PMLA, payment system operators are deemed to be reporting entities which are required to share customer / payment data with the authorities. PayPal refused to obtain registration on the grounds that it did not handle funds but was merely an OPGSP that facilitated exports between Indian merchants and foreign buyers. According to PayPal, it did not operate a payment system under the PSSA since it only provided a technology interface for the receipt of funds from overseas buyers. Given that the definition of 'payment system' under the PSSA and the PMLA were the same, PayPal argued that its operations could not be classified as a payment system under the PMLA. However, the Court disagreed with this approach and observed that OPGSPs have exclusive access to data points that are not captured elsewhere, and the said data was valuable financial intelligence for the FIU-IND. Failure of PayPal to register with the FIU-IND could deprive the FIU-IND of vital information and hinder its ability to detect and investigate suspicious transactions. Consequently, the Court ruled that OPGSPS such as PayPal were payment systems under the PMLA.

The decision of the Court has, in essence, been reaffirmed by the Circular. This can be demonstrated by the fact that the Circular requires PA-CB Entities to register with the FIU-IND as reporting entities.

CONCLUSION

By virtue of the Circular and the licensing mandate under it, the cross-border payments sphere is going to be far more tightly regulated than before. Going by the RBI's stringent approach to granting licenses under the PSSA, it is highly possible that the Circular could limit the number of licensed PA-CB Entities in the market. The RBI seems to have taken a conservative stance given the significant rise in cross-border e-commerce transactions. It also appears that one of the motives behind the Circular is to strengthen the AML/CFT measures undertaken by PA-CB Entities by compelling registration with the FIU-IND.

ANNEXURE

AUTHORIZATION REQUIREMENTS

  1. All PA-CB Entities have to obtain authorization from the RBI for the following categories:
  • Export only PA-CB;
  • Import only PA-CB; and
  • Export and Import PA-CB.
  1. Existing PA-CB Entities have to apply for authorization with the RBI by April 30, 2024, and such entities are permitted to continue providing PA-CB services until the RBI arrives at a decision on their application.
  2. PA-CB Entities have to ensure compliance with the following norms under the PA Guidelines by 31 January, 2024: (i) governance; (ii) merchant-on boarding; (iii) customer grievance redressal and dispute management framework; (iv) baseline technology recommendations; (v) security; and (vi) fraud prevention and risk management framework.
  3. PA-CB Entities have to register themselves with the FIU-IND prior to applying for authorization with the RBI.

CAPITAL REQUIREMENTS

  1. PA-CB Entities have to meet the following net-worth targets under the Circular:
  • Both existing and new PA-CB Entities should have a minimum net worth of INR 150 million as on the date of submitting their application for authorization.
  • Existing PA-CB Entities are required to maintain a minimum net worth of INR 250 million by March 31, 2026, while new PA-CB Entities should achieve this net worth milestone within three years from the date of authorization.
  1. An application for authorization by PA-CB Entities should be accompanied by certificates from statutory auditors evidencing compliance with the net-worth requirements.

SPECIFIC REQUIREMENTS

  1. Import-only PA-CB Entities are mandated to maintain an Import Collection Account ("ICA") with an AD Category-I Bank. Import payments are received in an escrow account of the PA and subsequently transferred to the ICA for onward transfer to foreign merchants,
  2. Import only PA-CB Entities are required to undertake the due diligence of buyers where the goods or services exceed INR 0.25 million per unit.
  3. Export only PA-CB Entities are expected to maintain an Export Collection Account ("ECA") with an AD Category-I Bank to which export proceedings are credited. Further, separate ECAs have to be maintained for every non-INR currency.
  4. PA-CB Entities have to comply with Know Your Customer (KYC) regulations by the RBI while onboarding Indian and foreign (i) merchants; (ii) e-commerce entities; and (iii) PAs.
  5. PA-CB Entities must ensure that they do not facilitate payment transactions for the import/export of goods or services that are prohibited or restricted under the Foreign Trade Policy.
  6. PA-CB Entities are disallowed from processing import/export transactions that exceed INR 2.5 million per unit.
  7. The PA Guidelines will apply to PA-CB Entities to the extent applicable and this includes restrictions on the debits and credits permitted to the ICA and ECA.

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.