The Division bench of the Delhi High Court, on September 15, 2022, in the matter of Lotus Pay Solutions Pvt. Ltd and Anr v Union of India and Ors. held that payment aggregators fall within the purview of the definition of ‘payment system’ under the Payment and Settlement Systems Act, 2007 (PSS Act).
Lotus Pay Solutions Pvt. Ltd (Petitioner), a payment intermediary engaged in the business of providing recurring payment solutions to its clients namely merchants/ e-commerce marketing companies, filed a writ petition involving interpretation of clause 3 (wherein PAs require prior authorization from the Reserve Bank of India); clause 4 (containing capital and net worth requirements to be satisfied by PAs for unencumbered operations) and clause 8 (containing requirement of maintenance of an escrow account with a scheduled commercial bank wherein all monies collected are to be stored) of the Guidelines on Regulation of Payment Aggregators and Payment Gateways (PA-PG Guidelines).
The Petitioner argued that owing to its nature of being an intermediary and merely performing payment collection services, it did not fall within the ambit of a ‘payment system’ and therefore did not require prior authorization from RBI (Respondent) to initiate and continue operations. Furthermore, with reference to clause 4, the Petitioner claimed that the ‘burdensome monetary conditions’ set by the RBI vis-a-vis the operations of PAs would lead to the eradication of small business enterprises and start-ups from the financial ecosystem. Additionally, the Petitioner as regards clause 8 alleged that the requirement of escrow accounts as opposed to nodal accounts proves to be onerous as PAs would only be permitted to maintain one escrow account. However, operations with multiple nodal accounts permits the distribution of operational risks (in case of financial instability as regards the banks), thereby protecting the funds of the relevant clients.
The Division bench, after analyzing the arguments of both the parties concluded that the functionality and operations of a PA fall under the ambit of a ‘payment system’. In doing so, the Delhi High Court examined the definition of ‘payment system’ as provided in the PSS Act (under various provisions) as well as RBI’s Discussion Paper (dated September 17, 2019). The Court held that owing to the nature of transactions carried out by the Petitioner, which involved the necessary parties (i.e. the payer and a beneficiary) coupled with the function of processing and collection of funds, the Petitioner could be construed as a payment system. Furthermore, the Court accepted the argument by the Respondent vis-a vis clause 4 of the PA-PG Guidelines, indicating that the original discussion paper (published by RBI) encapsulated a requirement of INR 100 crore net worth, however, subsequent to receiving submissions from various stake holders (and adopting the suggestions), the RBI scaled down the monetary requirement to maintenance of INR 15 crore (at the time of application) and INR 25 crore at the end of the third financial year, thereby catering to the relatively smaller players in the financial ecosystem. Also, the Court stated that as PAs handle funds of various customers, it is imperative that entities with a certain amount of financial ability and stability engage in the payment facilitation business.
Lastly, as regards clause 8, the Delhi High Court held that pursuant to issuance of circular dated November 17, 2020 (whereby the RBI permits the maintenance of an additional escrow account), the issue of spreading risk across all nodal accounts for risk averse operations is dealt with. The Court flagged the necessity of escrow accounts in events such as liquidation (of a financial institution), wherein the funds held in an escrow account would remain untouched in the process of debt payments.
The Delhi High Court in deciding the matter has provided utopian clarity on: (a) the scope of RBI to regulate payment systems, and (b) the inclusion of payment aggregators (even though e-commerce intermediaries) under ‘payment system’ (owing to the parties involved and the nature of functions carried out). The Court has adopted an all-inclusive view through analyzing the already existing PSS Act and the provisions thereunder and has further clarified that in the event a payer-beneficiary relationship is created, and funds are being collected and held, then the RBI would have scope to regulate such an entity under the PA-PG Guidelines.